Merger Clusters During Economic Booms
WZB Markets and Politics Working Paper No. SP II 2006-17
36 Pages Posted: 21 Nov 2006
Date Written: September 2006
Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target - by setting the takeover price - screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively "bad fit" acquirers, leading to a hike in merger activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term - a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher merger profits during "merger waves" than outside of waves, which is also in line with empirical evidence.
Keywords: Mergers, Merger Waves, Screening
JEL Classification: D21, D80, L11
Suggested Citation: Suggested Citation