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The Determinants of Merger Waves

  • Klaus Gugler
  • Dennis C. Mueller
  • B. Burçin Yurtoglu

One of the most conspicuous features of mergers is that they come in waves, and that these waves are correlated with increases in share prices and price/earnings ratios. We test four hypotheses that have been advanced to explain merger waves: the industry shocks, q-, overvaluation and managerial discretion hypotheses. The first two are neoclassical in that they assume that managers maximize profits, mergers create wealth, and the capital market is efficient. The last two, behavioral hypotheses relax these assumptions in different ways. We test the four hypotheses by estimating models of the amounts of assets acquired by firms, models that identify the characteristics of targets, and estimates of the returns to acquirers’ shareholders. Although some support is found for each of the four hypotheses, most of the evidence favors the two behavioral hypotheses. ZUSAMMENFASSUNG - (Die Determinanten von Fusionswellen) Es ist eines der auffallendsten Merkmale von Unternehmenszusammen-schlüssen, dass sie in Wellen stattfinden und dass diese Wellen mit dem Anstieg der Aktienkurse und des Preis/ Ertragsverhältnisses zusammen hängen. Wir untersuchen vier Hypothesen, die als Erklärung von Unternehmenszusammenschlüssen genannt werden: die der Industrieschocks, die q-Hypothese, die Hypothese der Überbewertung und die Hypothesen des Ermessensspielraums von Managern. Die ersten zwei sind neoklassischer Natur insofern als sie davon ausgehen, dass Manager Gewinne maximieren, Unternehmenszusammenschlüsse Reichtum schaffen und der Kapitalmarkt effizient ist. Die zwei letzteren sind Verhaltenshypothesen, die die neo-klassischen Annahmen (auf unterschiedliche Weise) lockern. Wir untersuchen die vier Hypothesen, indem wir Modellschätzungen der von Unternehmen akquirierten Aktien vornehmen. Dabei werden in den Modellen die Charakteristika der bei Zusammenschlüssen aufgekauften Unternehmen identifiziert und die Rendite für die Aktionäre des aufkaufenden Unternehmens geschätzt. Auch wenn alle vier Hypothesen in gewisser Hinsicht Bestätigung finden, untermauern die meisten Belege die zwei Verhaltenshypothesen.

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Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2006-01.

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Length: 51 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:wzb:wzebiv:spii2006-01
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  1. Mulherin, J. Harold & Boone, Audra L., 2000. "Comparing acquisitions and divestitures," Journal of Corporate Finance, Elsevier, vol. 6(2), pages 117-139, July.
  2. Mueller, Dennis C., 1977. "The effects of conglomerate mergers : A survey of the empirical evidence," Journal of Banking & Finance, Elsevier, vol. 1(4), pages 315-347, December.
  3. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
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  7. G. William Schwert, 1994. "Mark-Up Pricing in Mergers and Acquisitions," NBER Working Papers 4863, National Bureau of Economic Research, Inc.
  8. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
  9. Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, vol. 59(6), pages 2685-2718, December.
  10. Dennis C. Mueller & Mark L. Sirower, 2003. "The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(5), pages 373-391.
  11. Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu, 2004. "Marginal q, Tobin’s q, Cash Flow, and Investment," Southern Economic Journal, Southern Economic Association, vol. 70(3), pages 512-531, January.
  12. Sara B. Moeller & Frederik P. Schlingemann & Rene M. Stulz, 2004. "Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave," NBER Working Papers 10200, National Bureau of Economic Research, Inc.
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  16. Ming Dong & David Hirshleifer & Scott Richardson & Siew Hong Teoh, 2006. "Does Investor Misvaluation Drive the Takeover Market?," Journal of Finance, American Finance Association, vol. 61(2), pages 725-762, 04.
  17. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
  18. Cara S. Lown & Donald P. Morgan & Sonali Rohatgi, 2000. "Listening to loan officers: the impact of commercial credit standards on lending and output," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-16.
  19. Perfect, Steven B. & Wiles, Kenneth W., 1994. "Alternative constructions of Tobin's q: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 313-341, July.
  20. Andrade, Gregor & Stafford, Erik, 2004. "Investigating the economic role of mergers," Journal of Corporate Finance, Elsevier, vol. 10(1), pages 1-36, January.
  21. Chappell, Henry Jr. & Cheng, David C., 1984. "Firms' acquisition decisions and Tobin's q ratio," Journal of Economics and Business, Elsevier, vol. 36(1), pages 29-42, February.
  22. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
  23. Hay, Donald A & Liu, Guy S, 1998. "When Do Firms Go in for Growth by Acquisitions?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(2), pages 143-64, May.
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