The Real Effects of Uncertainty on Merger Activity
69 Pages Posted: 22 Nov 2014 Last revised: 4 Aug 2016
Date Written: March 16, 2016
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: Suggested Citation