The Fate of Firms: Explaining Mergers and Bankruptcies

Using a uniquely complete data set of more than 50,000 observations of approximately 16,000 corporations, we test theories that seek to explain which firms become merger targets and which firms go bankrupt. We find that merger activity is much greater during prosperous periods than during recessions. In bad economic times, firms in industries with high bankruptcy rates are less likely to file for bankruptcy than they are in better years, supporting the market illiquidity arguments made by Shleifer and Vishny (1992). At the firm level, we find that, among poorly performing firms, the likelihood of merger increases with poorer performance, but among better performing firms, the relation is reversed and chances of merger increase with better performance. Such a changing relation has not been detected in prior merger studies. We also find that low‐growth, resource‐rich firms are prime acquisition targets and that firms’ debt capacity relates negatively to the likelihood of a merger. Debt‐related variables, leverage and secured debt, play an especially prominent role in distinguishing between which firms merge and which firms go bankrupt.