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Waves and Persistence in Merger and Acquisition Activity

Author

Listed:
  • John T. Barkoulas

    (Louisiana Tech University)

  • Christopher F. Baum

    () (Boston College)

  • Atreya Chakraborty

    (Charles River Associates)

Abstract

Does merger and acquisition (M&A) activity occur in waves, that is, are there oscillations between low and high levels of M&A activity? The answer to this question is important in developing univariate as well as structural models of explaining and forecasting the stochastic behavior of M&A activity. There is evidence to suggest that aggregate U.S. time-series data on merger and acquisition (M&A) activity exhibit a "wave" behavior, which has been modeled by fitting either a two-state Markov switching-regime model or a sine-wave model to the data. This study provides an alternative characterization of the temporal patterns in M&A as a nonlinear process with strongly persistent or long-memory dynamics. The apparent level changes or partial cycles of differing magnitudes in aggregate M&A time series are consistent with an underlying data generating process exhibiting long memory. Time- and frequency-domain estimation methods are applied to a long M&A time series constructed by Town (1992), covering approximately a century of merger activity in the U.S. economy. We find significant evidence of long-term cyclical behavior, nonperiodic in nature, in the M&A time series, even after accounting for potential shifts in the mean level of the series. A shock to M&A activity exhibits significant persistence as it is damped at the very slow hyperbolic rate, but it eventually dissipates. We provide both theoretical and empirical rationales for the presence of fractional dynamics with long-memory features in M&A activity. Theoretically, long-term dependence may be due to persistent differences in firm valuation between stockholders and nonstockholders following an "economic disturbance," as suggested by Gort (1969). Empirically, long-memory dynamics in M&A activity may reflect the statistical properties of fundamental factors underlying its behavior, as several of the proposed determinants of M&A activity have been shown to exhibit strong persistence.

Suggested Citation

  • John T. Barkoulas & Christopher F. Baum & Atreya Chakraborty, 1997. "Waves and Persistence in Merger and Acquisition Activity," Boston College Working Papers in Economics 396, Boston College Department of Economics, revised 14 Dec 1999.
  • Handle: RePEc:boc:bocoec:396
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    References listed on IDEAS

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    1. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
    2. Baillie, Richard T & Bollerslev, Tim, 1994. "The long memory of the forward premium," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 565-571, October.
    3. Town, R J, 1992. "Merger Waves and the Structure of Merger and Acquisition Time-Series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 83-100, Suppl. De.
    4. Golbe, Devra L & White, Lawrence J, 1993. "Catch a Wave: The Time Series Behavior of Mergers," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 493-499, August.
    5. Diebold, Francis X. & Lindner, Peter, 1996. "Fractional integration and interval prediction," Economics Letters, Elsevier, vol. 50(3), pages 305-313, March.
    6. Michael Gort, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, Oxford University Press, vol. 83(4), pages 624-642.
    7. Sowell, Fallaw, 1992. "Modeling long-run behavior with the fractional ARIMA model," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 277-302, April.
    8. Shea, Gary S, 1991. "Uncertainty and Implied Variance Bounds in Long-Memory Models of the Interest Rate Term Structure," Empirical Economics, Springer, vol. 16(3), pages 287-312.
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    Citations

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    Cited by:

    1. Mike Fusillo, 2011. "Structural Factors Underlying Mergers and Acquisitions in Liner Shipping," Chapters,in: International Handbook of Maritime Economics, chapter 8 Edward Elgar Publishing.
    2. Florian Szücs, 2013. "Clustering Properties of Merger Waves: Space, Time or Industry?," Discussion Papers of DIW Berlin 1322, DIW Berlin, German Institute for Economic Research.
    3. Gärtner, Dennis L. & Halbheer, Daniel, 2009. "Are there waves in merger activity after all?," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 708-718, November.
    4. Nakamura, H. Richard, 2002. "Mapping Out the Japanese Mergers & Acquisitions Patterns - The Influence of Macro Factors on M & As," EIJS Working Paper Series 164, Stockholm School of Economics, The European Institute of Japanese Studies.
    5. Alberto Salvo, 2010. "Sequential Cross-border Mergers in Models of Oligopoly," Economica, London School of Economics and Political Science, vol. 77(306), pages 352-383, April.
    6. Lien Duong, 2013. "Aggregate Australian Takeovers: A Review of Markov Regime Switching Models," International Review of Finance, International Review of Finance Ltd., vol. 13(4), pages 529-558, December.
    7. Luis A. Gil-Alana & Andrea Mervar & James E. Payne, 2017. "The stationarity of inflation in Croatia: anti-inflation stabilization program and the change in persistence," Economic Change and Restructuring, Springer, vol. 50(1), pages 45-58, February.
    8. Margarita Sapozhnikov, 2006. "Mergers and Government Policy," Boston College Working Papers in Economics 656, Boston College Department of Economics.
    9. Marcelo Resende, 2012. "Long Memory in Mergers and Acquisitions: Sectoral Evidence for an Emerging Economy," Economics Bulletin, AccessEcon, vol. 32(4), pages 2876-2883.
    10. Nakamura, Richard, 2004. "To Merge And Acquire When The Times Are Good? The Influence Of Macro Factors On The Japanese M&A Pattern," EIJS Working Paper Series 197, Stockholm School of Economics, The European Institute of Japanese Studies.
    11. Gadea, Maria Dolores & Sabate, Marcela & Serrano, Jose Maria, 2004. "Structural breaks and their trace in the memory: Inflation rate series in the long-run," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(2), pages 117-134, April.
    12. Alberto Salvo, 2004. "A General Analysis of Sequential Merger Games with an Application to Cross-Border Mergers," STICERD - Economics of Industry Papers 36, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    13. Neumann, Gyde & Weiss, Christoph R., 2001. "Strukturwandel durch Fusionen im Ernährungssektor: Ein anhaltender Konzentrationsprozess?," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 50(6).
    14. Hou, Rui & Yang, Jianmei & Yao, Canzhong & McKelvey, Bill, 2015. "How does competition structure affect industry merger waves? A network analysis perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 140-156.

    More about this item

    Keywords

    long memory; fractional integration; spectral regression; maximum likelihood; Gaussian semiparametric method; takeovers.;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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