With deal making back in vogue, can the "bigger-is-better" crowd be far behind? It's only a matter of time before a new wave of mergers results in a deluge of analyses, white papers, and reports bearing the same tantalizing message: getting bigger can lead to a higher valuation multiple. These pitches usually come dressed up with seemingly authoritative charts showing that smaller companies in a given industry have lower P/E ratios or EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples than larger companies. There's only one problem: it isn't true.

Most senior managers understand that a combination of growth and returns on invested capital (ROIC) drive shareholder value.¹ But this knowledge won't spare executives from people who argue that if two small companies with low P/Es merge, the larger entity would naturally attain the higher multiples of its new peers. Empirical research, they will suggest, demonstrates real differences between the cost of capital for big and small companies.

Or they will mount logical arguments about bigger companies having preferential access to the capital markets—including improved analyst coverage, better suitability for increased institutional ownership, or a stronger balance sheet with more risk diversification.

Such research withers under closer scrutiny,...