Market Returns and Interim Risk in Mergers

49 Pages Posted: 24 Feb 2020 Last revised: 30 Aug 2021

See all articles by Davidson Heath

Davidson Heath

University of Utah - David Eccles School of Business

Mark L. Mitchell

University of Chicago - Booth School of Business; AQR Capital Management, LLC; CNH Partners

Date Written: July 21, 2021

Abstract

A primary concern in mergers and acquisitions is the risk the deal may be cancelled before it is completed. We document that this “interim risk” varies asymmetrically with the aggregate market return. Deals tend to be renegotiated when the market rises but cancelled when the market crashes. These effects are conditional on the method of payment and the contracting stage of the deal, consistent with a mechanism of ex post renegotiation. Variation in interim risk over time alters the method of payment in mergers and the firms that are targeted and acquired.

Keywords: mergers, acquisitions, completion, cancellation, market crashes, real effects, strategic default, method of payment, interim risk, definitive agreement

JEL Classification: G34, G30, K22

Suggested Citation

Heath, Davidson and Mitchell, Mark L., Market Returns and Interim Risk in Mergers (July 21, 2021). Available at SSRN: https://ssrn.com/abstract=3526931 or http://dx.doi.org/10.2139/ssrn.3526931

Davidson Heath (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Mark L. Mitchell

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

CNH Partners ( email )

One Greenwich Plaza
2nd Floor
Greenwich, CT 06830
United States
(203) 742-3001 (Phone)

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