The Real Effects of Financial Markets: The Impact of Prices on Takeovers

58 Pages Posted: 19 Mar 2008 Last revised: 4 Jun 2014

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ; National Bureau of Economic Research (NBER)

Wei Jiang

Emory University Goizueta Business School; ECGI; NBER

Date Written: June 6, 2011

Abstract

Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect.") Our results overturn prior literature which found a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: they impose discipline on managers by triggering takeover threats.

Keywords: Takeovers, mergers and acquisitions, market valuation, feedback effects, financial and real efficiency, merger waves

JEL Classification: G34, G14, C14, C34

Suggested Citation

Edmans, Alex and Goldstein, Itay and Jiang, Wei, The Real Effects of Financial Markets: The Impact of Prices on Takeovers (June 6, 2011). Journal of Finance 67(3), 933-971, June 2012, Available at SSRN: https://ssrn.com/abstract=1102201

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

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Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

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Wei Jiang

Emory University Goizueta Business School ( email )

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