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Technology Shocks, Q, and the Propensity to Merge

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Author Info
Lihong Han () (Department of Economics, Illinois College)
Peter L. Rousseau () (Department of Economics, Vanderbilt University)

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Abstract

Data on U.S. mergers and aquisitions from 1987 to 2006 indicate that firms with high market-to-book values (i.e., Tobin's Q) tend to merge with firms that have lower Q's, but that target Q's are on average higher than those of firms not involved in mergers at all. We capture this fact with a model in which the ratio of a bidder's Q to that of a prospective target has a non-monotone, inverted U-shaped effect on the probability of the two firms merging. Further, we find that the likelihood of a merger is positively and linearly related to the ratio of the growth potential of an acquirer and its prospective target. Using data from Compustat, a series of bootstrap logit regressions bear out these implications.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu09-w14.pdf
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File Function: First version, 2009
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0914.

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Date of creation: Sep 2009
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Handle: RePEc:van:wpaper:0914

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Related research
Keywords: Total factor productivity; growth potential; bootstrap logit model;

Find related papers by JEL classification:
G3 - Financial Economics - - Corporate Finance and Governance
O3 - Economic Development, Technological Change, and Growth - - Technological Change

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References listed on IDEAS
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  1. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring. [Downloadable!] (restricted)
  2. Faria, Andre L., 2008. "Mergers and the market for organization capital," Journal of Economic Theory, Elsevier, vol. 138(1), pages 71-100, January. [Downloadable!] (restricted)
  3. Boyan Jovanovic & Peter L. Rousseau, 2002. "The Q-Theory of Mergers," American Economic Review, American Economic Association, vol. 92(2), pages 198-204, May. [Downloadable!]
    Other versions:
  4. Matthew Rhodes-Kropf & David T. Robinson, 2004. "The Market for Mergers and the Boundaries of the Firm," Working Papers 05-18, Utrecht School of Economics. [Downloadable!]
    Other versions:
  5. Boyan Jovanovic & Peter L. Rousseau, 2008. "Mergers as Reallocation," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 765-776, 07. [Downloadable!] (restricted)
    Other versions:
  6. Cockburn, Iain & Griliches, Zvi, 1988. "Industry Effects and Appropriability Measures in the Stock Market's Valuation of R&D and Patents," American Economic Review, American Economic Association, vol. 78(2), pages 419-23, May. [Downloadable!] (restricted)
    Other versions:
  7. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June. [Downloadable!] (restricted)
  9. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December. [Downloadable!] (restricted)
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  10. Gort, Michael, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, MIT Press, vol. 83(4), pages 624-42, November. [Downloadable!] (restricted)
  11. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September. [Downloadable!] (restricted)
  12. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September. [Downloadable!] (restricted)
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