The Real Effects of Financial Markets: The Impact of Prices on Takeovers

Alex Edmans, Itay Goldstein and Wei Jiang

Journal of Finance, 2012, vol. 67, issue 3, 933-971

Abstract: Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the “trigger effect”). An interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the “anticipation effect”). Our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: They impose discipline on managers by triggering takeover threats.

Date: 2012
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https://doi.org/10.1111/j.1540-6261.2012.01738.x

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