The Fate of Firms: Explaining Mergers and Bankruptcies

37 Pages Posted: 7 Dec 2004

See all articles by Clas CH Bergström

Clas CH Bergström

Swedish House of Finance

Theodore Eisenberg

Cornell University, Law School (Deceased)

Stefan Sundgren

Swedish School of Economics and Business Administration

Martin T. Wells

Cornell University - Law School

Abstract

Using a uniquely complete data set of over 50,000 observations of approximately 16,000 corporations, we test theories that seek to explain which firms become merger targets and which firms go bankrupt. We find that merger activity is much greater during prosperous periods than during recessions. In bad economic times, firms in industries with high bankruptcy rates are less likely to file for bankruptcy than they are in better years, supporting the market illiquidity arguments made by Shleifer & Vishny (1992). At the firm level, we find that, among poorly performing firms, the likelihood of merger increases with poorer performance, but among better performing firms, the relation is reversed and chances of merger increase with better performance. Such a changing relation has not been detected in prior merger studies. We also find that low-growth, resource-rich firms are prime acquisition targets and that firms' debt capacity relates negatively to the likelihood of a merger. Debt-related variables, leverage and secured debt, play an especially prominent role in distinguishing between which firms merge and which firms go bankrupt.

Keywords: merger, bankruptcy, accounting

JEL Classification: G33, G34, G30

Suggested Citation

Bergström, Clas CH and Eisenberg, Theodore and Sundgren, Stefan and Wells, Martin T., The Fate of Firms: Explaining Mergers and Bankruptcies. Available at SSRN: https://ssrn.com/abstract=623241

Clas CH Bergström

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Theodore Eisenberg (Contact Author)

Cornell University, Law School (Deceased) ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States

Stefan Sundgren

Swedish School of Economics and Business Administration ( email )

P.O. Box 287
FI-65100 Vasa
Finland

Martin T. Wells

Cornell University - Law School ( email )

Comstock Hall
Ithaca, NY 14853
United States
607-255-8801 (Phone)

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