Valuation Waves and Merger Activity: The Empirical Evidence

63 Pages Posted: 15 Jan 2004

See all articles by Matthew Rhodes-Kropf

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: May 13, 2004

Abstract

To test recent theories that suggest valuation errors affect merger activity, we develop a decomposition that breaks M/B into three components: the firm-specific pricing deviation from short-run industry pricing; sector-wide, short-run deviations from firms' long-run pricing; and long-run pricing to book. We find strong support for recent theories by Rhodes-Kropf and Viswanathan (2003) and Shleifer and Vishny (2003), which predict that misvaluation drives mergers. So much of the behavior of M/B is driven by firm-specific deviations from short-run industry pricing, that long-run components of M/B run counter to the conventional wisdom: Low long-run value to book firms buy high long-run value to book firms. Misvaluation affects who buys whom, as well as method of payment, and combines with neoclassical explanations to explain aggregate merger activity.

JEL Classification: G12, G34

Suggested Citation

Rhodes-Kropf, Matthew and Viswanathan, S. and Robinson, David T., Valuation Waves and Merger Activity: The Empirical Evidence (May 13, 2004). 14th Conf. on Financial Economics & Accounting (FEA); AFA 2004 San Diego Meetings; EFA 2003 Meetings Paper No. 904; 5th Annual Texas Finance Festival. Available at SSRN: https://ssrn.com/abstract=412680 or http://dx.doi.org/10.2139/ssrn.412680

Matthew Rhodes-Kropf (Contact Author)

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

David T. Robinson

Fuqua School of Business, Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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