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

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

Accepted Paper Series