Learning-by-doing: the experience effect in mergers and acquisitions

We examine the relation between firms' prior acquisition experience and subsequent acquisition performance. Based on our sample firms' complete acquisition histories, we find that acquirers with prior experience in the target industry perform better in subsequent diversifying acquisitions, and that the effect is stronger in industries with higher uncertainty. The outperformance is attributable to experienced acquirers' ability to identify targets with higher synergies. Additional analysis shows that the experience effect is robust after controlling for management experience and other firm-specific factors, and that considering small acquisitions as part of a firm's learning process is essential to the experience effect.