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Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions

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  • Duchin, Ran
  • Schmidt, Breno
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    Abstract

    We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts' forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.

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    Bibliographic Info

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

    Volume (Year): 107 (2013)
    Issue (Month): 1 ()
    Pages: 69-88

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    Handle: RePEc:eee:jfinec:v:107:y:2013:i:1:p:69-88

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

    Related research

    Keywords: Mergers and acquisitions; Governance; Merger waves; Turnover; Uncertainty;

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    Cited by:
    1. Lin, Ji-Chai & Stephens, Clifford P. & Wu, YiLin, 2014. "Limited attention, share repurchases, and takeover risk," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 283-301.

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