58 Pages Posted: 19 Mar 2008 Last revised: 4 Jun 2014
Date Written: June 6, 2011
Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect.") Our results overturn prior literature which found a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: they impose discipline on managers by triggering takeover threats.
Keywords: Takeovers, mergers and acquisitions, market valuation, feedback effects, financial and real efficiency, merger waves
JEL Classification: G34, G14, C14, C34
Suggested Citation: Suggested Citation
Edmans, Alex and Goldstein, Itay and Jiang, Wei, The Real Effects of Financial Markets: The Impact of Prices on Takeovers (June 6, 2011). Journal of Finance 67(3), 933-971, June 2012. Available at SSRN: https://ssrn.com/abstract=1102201