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The Effect of Search Frictions on Mergers

30 Pages Posted: 23 Mar 2009 Last revised: 6 Jul 2009

Filippos Papakonstantinou

Imperial College London

Marc Martos-Vila

London Business School - Department of Finance; University of California, Los Angeles (UCLA) - Finance Area

Date Written: August 1, 2008


We empirically study the existence and impact of search frictions in the market for corporate control in order to explain who makes acquisitions. We proxy search frictions with the board of director's degree of connectedness. Alternatively, we capture such frictions using geographic proximity and business similarity. Measures of market thickness also contribute to the overall effect of search frictions and are included. Based on recent theoretical approaches to the M&A market, management incentives are an important element when identifying who might become an acquirer. Using data from 1990 to 2006, we find that firms are more likely to be acquirers (targets) when search frictions are low (high), there are more firms available to buy (thicker market), and a golden parachute is not (is) provided to the firm's manager. These findings are largely consistent with predictions from the recent theoretical literature that models the decision of firms to actively search for potential targets. We alleviate concerns that these results are driven by firm heterogeneity or selection bias, by showing that they are robust to the use of OLS with firm-level fixed effects and instrumental variables using CEO salary and lagged board connectedness, respectively. Furthermore, a dynamic panel data estimator is also used. We find that the provision of golden parachutes increases the average acquirer abnormal return by 2.5% whereas it does not significantly impact target premiums and that business similarity and geographic proximity affects target premiums.

Keywords: Mergers, Acquirer, Target, Search, Golden Parachute, Premiums, Board of Directors

JEL Classification: C78, D82, D83, G34, J33, G14, M52

Suggested Citation

Papakonstantinou, Filippos and Martos-Vila, Marc, The Effect of Search Frictions on Mergers (August 1, 2008). Available at SSRN: or

Filippos Papakonstantinou

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Marc Martos-Vila (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States

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