Market Returns and Interim Risk in Mergers
55 Pages Posted: 24 Feb 2020 Last revised: 6 Aug 2020
Date Written: August 4, 2020
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 paid in cash tend to be renegotiated when the market rises but cancelled when the market crashes. There is no such effect for deals paid in stock, consistent with a mechanism of costly renegotiation. Variation in interim risk over time affects the market for corporate control, altering the method of payment 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: Suggested Citation