IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/19378.html
   My bibliography  Save this paper

Financial vs. Strategic Buyers

Author

Listed:
  • Marc Martos-Vila
  • Matthew Rhodes-Kropf
  • Jarrad Harford

Abstract

This paper introduces the impact of debt misvaluation on merger and acquisition activity. Debt misvaluation helps explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). The effects of overvalued debt might seem limited since both acquirer types and target firms can access the debt markets. However, fundamental differences in governance and project co-insurance between the two types of acquirer interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

Suggested Citation

  • Marc Martos-Vila & Matthew Rhodes-Kropf & Jarrad Harford, 2013. "Financial vs. Strategic Buyers," NBER Working Papers 19378, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19378
    Note: CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w19378.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Kim, E Han & McConnell, John J, 1977. "Corporate Mergers and the Co-insurance of Corporate Debt," Journal of Finance, American Finance Association, vol. 32(2), pages 349-365, May.
    3. 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.
    4. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    5. Patrick Bolton & José Scheinkman & Wei Xiong, 2006. "Executive Compensation and Short-Termist Behaviour in Speculative Markets," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 577-610.
    6. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-537, May.
    7. Antoine Faure- Grimaud & Roman Inderst, 2005. "Conglomerate Entrenchment under Optimal Financial Contracting," American Economic Review, American Economic Association, vol. 95(3), pages 850-861, June.
    8. Gary Gorton & Matthias Kahl & Richard Rosen, 2005. "Eat or Be Eaten: A Theory of Mergers and Merger Waves," NBER Working Papers 11364, National Bureau of Economic Research, Inc.
    9. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
    10. Morellec, Erwan & Zhdanov, Alexei, 2008. "Financing and takeovers," Journal of Financial Economics, Elsevier, vol. 87(3), pages 556-581, March.
    11. Anand M. Goel & Anjan V. Thakor, 2008. "Overconfidence, CEO Selection, and Corporate Governance," Journal of Finance, American Finance Association, vol. 63(6), pages 2737-2784, December.
    12. Higgins, Robert C & Schall, Lawrence D, 1975. "Corporate Bankruptcy and Conglomerate Merger," Journal of Finance, American Finance Association, vol. 30(1), pages 93-113, March.
    13. Mulherin, J. Harold & Boone, Audra L., 2000. "Comparing acquisitions and divestitures," Journal of Corporate Finance, Elsevier, vol. 6(2), pages 117-139, July.
    14. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    15. 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.
    16. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, René M. & Zutter, Chad J., 2008. "Why do private acquirers pay so little compared to public acquirers?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 375-390, September.
    17. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    18. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
    19. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    20. Augustin Landier & David Thesmar, 2009. "Financial Contracting with Optimistic Entrepreneurs," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 117-150, January.
    21. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
    22. 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.
    23. Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, vol. 59(6), pages 2685-2718, December.
    24. Victoria Ivashina & Anna Kovner, 2011. "The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2462-2498.
    25. Hege, Ulrich & Lovo, Stefano & Slovin, Myron B. & Sushka, Marie E., 2009. "Asset sales and the role of buyers: strategic buyers versus private equity," MPRA Paper 39549, University Library of Munich, Germany, revised Feb 2012.
    26. Holger M. Müller & Fausto Panunzi, 2004. "Tender Offers and Leverage," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1217-1248.
    27. Michael C. Jensen, 2005. "Agency Costs of Overvalued Equity," Financial Management, Financial Management Association, vol. 34(1), Spring.
    28. repec:hrv:faseco:30748164 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mike Burkart & Amil Dasgupta, 2014. "Activist Funds, Leverage, and Procyclicality," FMG Discussion Papers dp733, Financial Markets Group.
    2. repec:eee:eecrev:v:94:y:2017:i:c:p:166-184 is not listed on IDEAS
    3. Baziki, Selva Bahar & Norbäck, Pehr-Johan & Persson, Lars & Tåg, Joacim, 2017. "Cross-border acquisitions and restructuring: Multinational enterprises and private equity-firms," European Economic Review, Elsevier, vol. 94(C), pages 166-184.
    4. Valentin Haddad & Erik Loualiche & Matthew Plosser, 2017. "Buyout Activity: The Impact of Aggregate Discount Rates," Journal of Finance, American Finance Association, vol. 72(1), pages 371-414, February.
    5. Norbäck, Pehr-Johan & Persson, Lars & Tåg, Joacim, 2010. "Buying to Sell: A Theory of Buyouts," Working Paper Series 817, Research Institute of Industrial Economics.
    6. repec:eee:ecolet:v:159:y:2017:i:c:p:142-144 is not listed on IDEAS
    7. Baziki, Selva & Norbäck, Pehr-Johan & Persson, Lars & Tåg, Joacim, 2015. "Cross-Border Acquisitions and Restructuring: Multinational Enterprises versus Private Equity-Firms," Working Paper Series 1057, Research Institute of Industrial Economics.

    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:19378. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.