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Are Volatile Firms Better at Acquiring

For a comprehensive sample of mergers and acquisitions involving both public and private targets, we find that acquirers with higher (idiosyncratic) volatility earn higher announcement returns. Consistent with the Limits to Arbitrage hypothesis, this positive relation is reversed over the longer horizon and decays over time. In the range of lower volatility, where there are fewer limits to arbitrage, acquirer returns decrease with volatility, consistent with the Information Quality hypothesis. Combined, there is a V-shape relation between acquirer returns and volatility. Our main results are robust and reconcile the seemingly contradictory findings in the literature.