The Real Effects of Uncertainty on Merger Activity

69 Pages Posted: 22 Nov 2014 Last revised: 4 Aug 2016

See all articles by Vineet Bhagwat

Vineet Bhagwat

George Washington University - Department of Finance

Robert A. Dam

University of Colorado at Boulder - Department of Finance

Jarrad Harford

University of Washington

Date Written: March 16, 2016

Abstract

Firm value can change substantially between the time deal terms for a public target are set and closing, risking renegotiation or termination. We find increases in market volatility decrease subsequent deal activity, but only for public targets subject to an interim period. The effect is strongest when volatility is highest, for deals taking longer to close, and for larger targets. Merging parties attempt to shorten the interim window as risk increases. Firm- and industry-level uncertainty measures reveal similar findings, ruling-out an unobserved macro variable. We conclude interim uncertainty contributes to understanding the timing and intensity of public firms’ merger activity.

Keywords: uncertainty, investment, merger, acquisition, VIX

JEL Classification: G34, E22

Suggested Citation

Bhagwat, Vineet and Dam, Robert A. and Harford, Jarrad, The Real Effects of Uncertainty on Merger Activity (March 16, 2016). Available at SSRN: https://ssrn.com/abstract=2528844 or http://dx.doi.org/10.2139/ssrn.2528844

Vineet Bhagwat

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

Robert A. Dam (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-2289 (Phone)

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

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