Big Moves, Small Gains: Unpacking the Size Effect in Takeovers and Other Corporate Deals

Abstract

This study explores the size effect in financial markets, focusing on how mergers, acquisitions, and other corporate transactions influence the returns of small versus large stocks. Employing a comprehensive data set of US-listed companies from 1992 to 2021, which includes 51,780 events, this research improves upon previous methodologies by integrating detailed timing information on deal announcements and completions with stock size and return data. Our analysis shows that small stocks are often the targets of transactions that significantly enhance their returns, not limited to takeovers. We find that pre-announcement returns are consistently higher for small stocks, likely due to less analyst coverage, resulting in largely unanticipated deal news. The study deepens our understanding of the size effect, suggesting that deal-related dynamics are essential for analyzing performance variations across different stock sizes and contributing to discussions on market efficiency and the valuation effects of corporate actions.