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http://ssrn.com/abstract=1102796
 
 

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Riding the Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions


Ran Duchin


University of Washington - Michael G. Foster School of Business

Breno Schmidt


Emory University - Goizueta Business School

January 1, 2012

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts’ forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.

Number of Pages in PDF File: 50

Keywords: mergers and acquisitions, governance, merger waves, turnover, uncertainty

JEL Classification: G34, G14

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Date posted: March 6, 2008 ; Last revised: January 31, 2012

Suggested Citation

Duchin, Ran and Schmidt, Breno, Riding the Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions (January 1, 2012). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1102796 or http://dx.doi.org/10.2139/ssrn.1102796

Contact Information

Ran Duchin
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
Breno Schmidt (Contact Author)
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
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