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Technology Shocks, Q, and the Propensity to Merge

  • Lihong Han

    ()

    (Department of Economics, Illinois College)

  • Peter L. Rousseau

    ()

    (Department of Economics, Vanderbilt University)

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.accessecon.com/pubs/VUECON/vu09-w14.pdf
File Function: First version, 2009
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0914.

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Date of creation: Sep 2009
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Handle: RePEc:van:wpaper:0914
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  1. Boyan Jovanovic & Peter L. Rousseau, 2002. "The Q-Theory of Mergers," NBER Working Papers 8740, National Bureau of Economic Research, Inc.
  2. Iain Cockburn & Zvi Griliches, 1987. "Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents," NBER Working Papers 2465, National Bureau of Economic Research, Inc.
  3. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc.
  4. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
  5. Boyan Jovanovic & Peter L. Rousseau, 2008. "Mergers as Reallocation," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 765-776, November.
  6. 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.
  7. Gort, Michael, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, MIT Press, vol. 83(4), pages 624-42, November.
  8. 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.
  9. 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.
  10. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
  11. Servaes, Henri, 1991. " Tobin's Q and the Gains from Takeovers," Journal of Finance, American Finance Association, vol. 46(1), pages 409-19, March.
  12. Faria, Andre L., 2008. "Mergers and the market for organization capital," Journal of Economic Theory, Elsevier, vol. 138(1), pages 71-100, January.
  13. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
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