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

50 Pages Posted: 6 Mar 2008 Last revised: 31 Jan 2012

Ran Duchin

University of Washington - Michael G. Foster School of Business

Breno Schmidt

Emory University - Goizueta Business School

Date Written: January 1, 2012

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.

Keywords: mergers and acquisitions, governance, merger waves, turnover, uncertainty

JEL Classification: G34, G14

Suggested Citation

Duchin, Ran and Schmidt, Breno, Riding the Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions (January 1, 2012). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1102796 or http://dx.doi.org/10.2139/ssrn.1102796

Ran Duchin

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Breno Schmidt (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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