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http://ssrn.com/abstract=1102201
 
 

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


Alex Edmans


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)

Itay Goldstein


University of Pennsylvania - The Wharton School - Finance Department

Wei Jiang


Columbia Business School - Finance and Economics

June 6, 2011

Journal of Finance 67(3), 933-971, June 2012

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.

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, C34

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Date posted: March 19, 2008 ; Last revised: December 20, 2013

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: http://ssrn.com/abstract=1102201

Contact Information

Alex Edmans (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
University of Pennsylvania - The Wharton School ( email )
3733 Spruce Street
Philadelphia, PA 19104-6374
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Itay Goldstein
University of Pennsylvania - The Wharton School - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Wei Jiang
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

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