Cost Stickiness, Adjustment Costs and Value Creation in M&A Deals

We examine the association of asymmetric cost behavior of acquirers and value creation in mergers and acquisitions (M&A). We find that less sticky acquirers — that is, acquirers with greater resource-adjustment flexibility — earn higher abnormal returns around the acquisition announcement, consistent with greater flexibility facilitating better target integration. We then show that acquirers with greater resource-adjustment flexibility acquire more-intangible-intensive targets, suggesting that their resource-adjustment flexibility allows them to better integrate acquired intangibles. In additional tests, we do not find evidence of an increase in cost-stickiness in the long window around the acquisition. Collectively, the evidence suggests that good acquirers (a) have greater flexibility in resource decisions and (b) purchase more intangible-intensive targets, which likely enables the acquirers to increase long-term abnormal profitability.