The impact of the macroeconomic environment on merger activity: evidence from US time-series data

Seung Hee Choi and Bang Jeon

Applied Financial Economics, 2011, vol. 21, issue 4, 233-249

Abstract: This article investigates the dynamic impact of the macroeconomic environment on aggregate merger activity in the US economy obtained from firm-level data during the period from January 1980 to December 2004. Applying time-series econometric tools to US Mergers and Acquisitions (M&A) data, we find: First, there is a long-run equilibrium relationship between the set of macroeconomic variables and four alternative measures of merger activity, implying that the macroeconomic factors plays an important role in determining the trend of aggregate merger activity in the US economy. Second, the most important macroeconomic variables in determining M&A volume include real income for the frequency-based measure of US merger activity, and stock market conditions and monetary policy for transaction value based measures of aggregate mergers. The ascending phase of business cycle provides the most favourable environment for more mergers for all four measures of merger activity. Our subsample period study provides evidence that 'corporate net cash flow' plays a significant role after 1998, which is consistent with the free-cash-flow hypothesis. Third, there are short run adjustment processes to the long-run equilibrium path in US merger activity. The main processes of impulse-response dynamics seem to finish within the 5-6 quarter period. We also discuss policy implications and directions for future extension.

Date: 2011
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DOI: 10.1080/09603107.2010.528365

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