The Real Effects of Financial Markets: The Impact of Prices on Takeovers
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Finance Papers
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Finance
Finance and Financial Management
Finance and Financial Management
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Edmans, Alex
Goldstein, Itay
Jiang, Wei
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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.
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2012-01-01
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The Journal of Finance