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The role of risk management in mergers and merger waves

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  • Garfinkel, Jon A.
  • Hankins, Kristine Watson

Abstract

We show that merger activity and particularly waves are significantly driven by risk management considerations. Increases in cash flow uncertainty encourage firms to vertically integrate and this contributes to the start of merger waves. These effects are incremental to previously identified causes of wave activity. Our risk management hypothesis is further supported by cross-sectional differences in the likelihood that a firm vertically integrates, and by the post-acquisition characteristics of vertically integrating firms. These results are consistent with the view (from the industrial organization literature) that vertical integration is an operational hedging mechanism that reduces the cost of increased uncertainty.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 3 (September)
Pages: 515-532

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:3:p:515-532

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Merger waves Vertical integration Risk management;

References

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Citations

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Cited by:
  1. Nils Herger & Steve McCorriston, 2014. "Horizontal, Vertical, and Conglomerate Cross Border Acquisitions," Discussion Papers 1402, Exeter University, Department of Economics.
  2. Andreou, Panayiotis C. & Louca, Christodoulos & Panayides, Photis M., 2012. "Valuation effects of mergers and acquisitions in freight transportation," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(6), pages 1221-1234.
  3. Nils Herger & Steve McCorriston, 2014. "Horizontal, Vertical, and Conglomerate FDI: Evidence from Cross Border Acquisitions," Working Papers 14.02, Swiss National Bank, Study Center Gerzensee.

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