Acquisitions and the Opportunity Set

This study analyzes the impact of various proxies for an acquirer's opportunity set on its post-acquisition abnormal performance and on its likelihood of making an acquisition. Our initial empirical analysis consists of a sample of acquisitions by Real Estate Investment Trusts (REITs) of public and private targets over the period 1994 to 2015. Using REIT acquisitions allows us to utilize an alternative measure, the cap rate, of the firm's opportunity set, in addition to those available for regular corporations: Tobin's Q and short momentum. Specifically, we use the regional cap rate that corresponds to the target's headquarters. Controlling for multiple factors that influence post-acquisition performance, we find that buy-and-hold abnormal returns to REIT acquirers are highly positively related to the cap rate at the time of the acquisition; however, Tobin's Q has no significant impact. Short momentum has a negative impact on performance. We also show that higher cap rates, Tobin's Q and short momentum all lead to more frequent acquisitions. In addition, we analyze a sample of 25,851 property acquisitions and find that the cap rate and Tobin's Q are positively related to the number of property acquisitions a REIT makes. The results of this empirical analysis support the notion that positive investment opportunities in real markets (organic growth) are associated with positive acquisition opportunities (inorganic growth). We perform several robustness tests to corroborate our results.