The Real Effects of Financial Markets: The Impact of Prices on Takeovers
London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
University of Pennsylvania - The Wharton School - Finance Department
Columbia Business School - Finance and Economics
June 6, 2011
AFA 2009 San Francisco Meetings Paper
Journal of Finance, Forthcoming
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.
Number of Pages in PDF File: 58
Keywords: Takeovers, mergers and acquisitions, market valuation, feedback effects, financial and real efficiency, merger waves
JEL Classification: G34, G14, C14, C34Accepted Paper Series
Date posted: March 19, 2008 ; Last revised: December 7, 2011
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