Riding the Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions
University of Washington - Michael G. Foster School of Business
Emory University - Goizueta Business School
January 1, 2012
Journal of Financial Economics (JFE), Forthcoming
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
Date posted: March 6, 2008 ; Last revised: January 31, 2012
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