A Critical Review Of Neoclassical And Behavioural Theories Of Merger Waves

In this paper we propose a novel perspective regarding the interdependence of certain elements, crucial in providing financial resources to entrepreneurial firms, using a variety of different financing channels. We use a theoretical approach to define a set of layers that can be used to determine the relevance of certain financing types, for companies with certain characteristics. These layers are represented by company development stage, field of activity, size, use of financing resources, orientation for long- or short-term financing, complexity of legal and administrative procedures and refundable or non-refundable nature of the financing. We discuss the perspectives of this analysis model for future empirical analyses that may contribute to its improvement. This paper aims to identify and critically evaluate the theoretical explanations of mergers happening in clusters. We identified two streams of theories: neoclassical and behavioural explanations of merger waves. Neoclassical theories include q theory and industry shock hypothesis. Behavioural theories studied incorporate share mis-valuation theory, managerial hubris hypothesis, and managerial discretion theory. Q theory states that efficient firms take over inefficient firms during market expansions. Industry shock hypothesis views resource reallocation requirements due to economic, technological, or regulatory shocks as causes of merger waves. Neoclassical theories, hypothesizing gain from mergers, assumes that markets are efficient, and managers maximize shareholder wealth. Share mis-valuation theory suggests that mergers waves occur when managers of overvalued firms use overvalued stocks to takeover undervalued targets in inefficient markets. Managerial hubris hypothesis, assuming of strong market efficiency, attributes merger waves to overconfidence of irrational managers about estimated gain from acquisition. Managerial discretion theory, more relevant for conglomerate merger, attributes merger waves as results of managerial empire building. We conclude that both the streams of theories should co-exist unless a new theory incorporating the strengths of the two has emerged.