Tuesday, May 10, 2011

KIM Ji-Yub (Jay), HALEBLIAN Jerayr (John), FINKELSTEIN Sydney
When Firms are Desperate to Grow via Acquisition: The Effect of Growth Patterns and Acquisition Experience on Acquisition Premiums Administrative Science Quarterly 56, 1 (2011) 26-60

In this paper we draw on work in behavioural learning theory and risk taking to examine whether firms desperate for growth overpay for acquisitions, and we develop a theory of desperation in the context of growth. We suggest two key drivers of such desperation: (1) when a firm’s organic growth is low, paying handsomely for acquisitions may be one of the few options for growth, and (2) when a firm becomes dependent on acquisitions for continuing growth, it is vulnerable to overpaying for acquisitions. Although pressures to grow via acquisition can be intense, we also test whether the benefits of acquisition experience—from both acquirers and their advisors—help to prevent overpayment caused by desperation. We test these ideas in a sample of firms in the banking industry between 1994 and 2005. Consistent with this theory of desperation, our results show that firms desperate for growth are more likely to pay high acquisition premiums. Our findings on the moderating role of acquisition experience show that advisors’ acquisition experience is more helpful than acquirers’ own acquisition experience in preventing desperate acquirers from overpaying for a target. Taken together, this study introduces and tests a new theoretical perspective on firm behaviour in the context of growth and suggests how such a perspective might be applicable in other contexts