The Fed Information Shocks and the Market for Corporate Control: Predictive and Causal Effects
41 Pages Posted: 28 Dec 2022 Last revised: 5 Aug 2023
Date Written: August 4, 2023
Abstract
We show that contractionary monetary shocks, when reflecting a positive macroeconomic assessment by the Federal Reserve (hereafter “Fed”), predict an economic environment that is characterized by (a) a rise in M&A activity, (b) a higher likelihood of M&A completion, (c) higher bidder gains, (d) limited concerns about M&A overpayment, and (e) higher premia offered by foreign bidders to U.S. targets. Further, Fed information shocks have a standalone and direct causal effect on the market expectations of M&A wealth effects. We show that they trigger a positive revaluation of pending M&A, which is more pronounced in deals that are large, financed with stock, and have received a strong negative market reaction at the M&A announcement period. Overall, our results highlight the independent and credible signaling role of the Fed in the realm of M&A.
Keywords: Monetary Policy; Mergers and Acquisitions; Information Shocks; Takeover Premium; Cumulative Abnormal Returns.
JEL Classification: D83, E43, E44, E52, E58, G34.
Suggested Citation: Suggested Citation