The Role of Risk Management in Mergers and Merger Waves

41 Pages Posted: 12 Oct 2010 Last revised: 7 Jul 2011

See all articles by Jon A. Garfinkel

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Kristine Watson Hankins

University of Kentucky

Date Written: September 7, 2010

Abstract

We show that merger activity and particularly waves are significantly driven by risk management considerations. Increases in cash flow uncertainty encourage firms to vertically integrate and this contributes to the start of merger waves. These effects are incremental to previously identified causes of wave activity. Our risk management hypothesis is further supported by cross-sectional differences in the likelihood that a firm vertically integrates, and by the post-acquisition characteristics of vertically integrating firms. These results are consistent with the view (from the industrial organization literature) that vertical integration is an operational hedging mechanism that reduces the cost of increased uncertainty.

Keywords: risk management, merger waves, vertical integration

JEL Classification: G34, G32

Suggested Citation

Garfinkel, Jon A. and Hankins, Kristine Watson, The Role of Risk Management in Mergers and Merger Waves (September 7, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1690804

Jon A. Garfinkel

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

Kristine Watson Hankins (Contact Author)

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States

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