The Impact of Monetary Policy on M&A Outcomes

Abstract

Monetary policy influences a wide range of Mergers and Acquisitions (M&A) outcomes. First, an increase in the federal funds rate predicts a negative market reaction to M&A announcements, an increase in the likelihood of deal withdrawal, and significant financing challenges for the acquirer in the post-acquisition phase. Second, M&As announced during periods of high monetary policy uncertainty are associated with significant declines in acquirer value. This negative market reaction reflects a unique discount to compensate for the high riskiness of M&As in an uncertain monetary environment. Finally, we show that monetary contraction, rather than monetary policy uncertainty, is a key contributor to the decline in the aggregate M&A activity.

Keywords: Federal funds rate, Expected financing cost, Monetary policy uncertainty, Real options, Mergers and Acquisitions (M&As), Acquirer abnormal returns, M&A completions

JEL Classification: G12, G34, E52