Bad Corporate Marriages: Waking Up in Bed the Morning After

51 Pages Posted: 28 Dec 2013 Last revised: 10 May 2014

See all articles by Ye Cai

Ye Cai

Santa Clara University - Leavey School of Business

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: December 27, 2013

Abstract

This paper examines corporate risk taking behavior in the wake of unsuccessful merger activities. We find that relative to other firms, firms that made bad acquisitions take both more systematic risk and more idiosyncratic risk. Moreover, higher risk is associated with greater value destruction and stronger corporate governance. The increased risk can be traced to increased cash flow volatility, increased leverage, decreased asset liquidity, more investment in R&D, and more equity-based executive compensation. These findings are in line with the behavioral approach suggesting that in the domain of losses, decision makers generally become more tolerant of risk.

Suggested Citation

Cai, Ye and Shefrin, Hersh, Bad Corporate Marriages: Waking Up in Bed the Morning After (December 27, 2013). Available at SSRN: https://ssrn.com/abstract=2372248 or http://dx.doi.org/10.2139/ssrn.2372248

Ye Cai

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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