Market Valuation and Merger Waves

Posted: 22 Nov 2002  

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Abstract

Does valuation affect mergers? The data suggests that periods of stock merger activity are correlated with high market valuations. The naive explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over and under valuation of the stock market. Thus, valuation fundamentally impacts mergers.

Keywords: Mergers, Auction Theory, Financial Auctions, Bidding with Securities, Valuation in mergers

JEL Classification: G34, D44

Suggested Citation

Rhodes-Kropf, Matthew and Viswanathan, S., Market Valuation and Merger Waves. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=334944 or http://dx.doi.org/10.2139/ssrn.334944

Matthew Rhodes-Kropf (Contact Author)

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Paper statistics

Abstract Views
4,459