Real Investment Under Ambiguity: Evidence from Mergers and Acquisitions

Abstract

We empirically show that firms facing high ambiguity---Knightian uncertainty---make less organic investment and more merger and acquisition bids, particularly for targets in different industries. Further, bidder ambiguity declines following bids. Conversely, firms facing low ambiguity are likely targets. The propensity and speed of deal completion increase in the spread between bidder and target ambiguity. All-stock bids are less likely from bidders facing high ambiguity, whereas all-cash bids are less likely for targets facing high ambiguity. Bidders facing higher ambiguity have higher abnormal announcement returns and pay larger premia for targets facing low ambiguity.

Keywords: Knightian Uncertainty; Ambiguity Measure; Ambiguity Aversion; Capital Expenditures; Mergers; Acquisitions

JEL Classification: D81; D83; G31; G34