Exploring the acquisition behavior of penny stock firms

We document that penny stock firms' acquisition likelihood increases with firm size, sales growth, free cash flow, stock price volatility, and run-up, but decreases with leverage, the number of years since IPO, and Tobin's Q. These findings are validated in a stepwise regression framework and are robust to alternative model specifications. Penny stock acquirers prefer private targets and are more (less) likely to use stocks (cash) as the payment method. We also find that acquisitions announcement returns are higher for penny stock firms than for non-penny stock firms, even after accounting for firm- and deal-characteristics. Further analyses indicate that the increase in announcement returns is driven by the firm's improved information environment. Overall, we document that penny stock firms are significant players in the market for corporate control.