Market Returns and Interim Risk in Mergers

55 Pages Posted: 24 Feb 2020 Last revised: 6 Aug 2020

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: August 4, 2020

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 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

Heath, Davidson and Mitchell, Mark L., Market Returns and Interim Risk in Mergers (August 4, 2020). 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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