Monetary Shocks, Local Betas, and Cross-Regional M&As

Abstract

Monetary policy is known to have heterogeneous regional economic effects. Building on the notion that production factors and investment opportunities are locally concentrated, we show that firms partly navigate the uncertainty associated with monetary contraction by altering the scope of their cross-regional mergers and acquisitions (M&A). Monetary contraction makes companies located in regions with highly cyclical economies (high local betas) more likely to acquire targets located in regions with low economic cyclicality (low local betas). These deals are less likely to be settled with stocks due to the decreasing confidence in the acquirer’s business prospects under tight monetary policy. Acquisitions also take place in the opposite direction, as companies located in regions with low local betas become more likely to acquire targets in high local beta regions. Both the high- and low-beta acquirers that diversify their cyclical exposure in response to monetary shocks become less likely to experience increases in stock volatility. These acquirers also experience smaller dispersion in business performance. This neutralizing effect is stronger in cross-regional M&As involving relatively large targets. Our findings have direct implications for shareholder wealth gains.

Keywords: Mergers and Acquisitions, Monetary Policy, Local Betas, Geographic Diversification.

JEL Classification: E52, G34, R1.