Critical Finance Review > Vol 6 > Issue 1

Acquisitions as Lotteries? The Selection of Target-Firm Risk and its Impact on Merger Outcomes

Christoph Schneider, University of Mannheim, Germany, Oliver Spalt, Tilburg University, The Netherlands,
Suggested Citation
Christoph Schneider and Oliver Spalt (2017), "Acquisitions as Lotteries? The Selection of Target-Firm Risk and its Impact on Merger Outcomes", Critical Finance Review: Vol. 6: No. 1, pp 77-132.

Published: 27 Mar 2017
© 2017 C. Schneider and O. Spalt
Behavioral Corporate FinanceMergers and AcquisitionsGambling

Article Help


Download article
In this article:
1. Introduction
2. Data and Key Variables
3. Target Riskiness and Merger Outcomes
4. An Explanation Based on CEO Gambling Preferences
5. Extensions and Alternative Explanations
6. Contribution to the Literature
7. Conclusion


From 1987 to 2008, riskier firms were more likely to be taken over. Yet, on average, the acquirer declined in value by 2.8% when it bought a “risky target” (the third tercile, having an annualized idiosyncratic volatility of 61% or more), but only by 0.6% when it bought a “safe target” (the first tercile, 38% or less). The effect was even stronger for risky targets with positively skewed expected returns. The value difference is robust to controlling for acquirer and target characteristics, and carries over to the joint value change. Riskier target acquisitions also had lower post-acquisition accounting returns. An acquiring-firm CEO fixed effect in the data suggests CEO preferences play a role, which we can trace to several proxies for gambling propensity.