The real effects of financial markets: the impact of prices on takeovers

Edmans, A, Goldstein, I and Jiang, W (2012) The real effects of financial markets: the impact of prices on takeovers. Journal of Finance, 67 (3). pp. 933-971. ISSN 0022-1082

Abstract

Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the “trigger effect”). An interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the “anticipation effect”). Our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: They impose discipline on managers by triggering takeover threats.

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Item Type: Article
Subject Areas: Finance
Date Deposited: 17 May 2016 12:17
Last Modified: 21 Nov 2019 18:04
URI: http://lbsresearch.london.edu/id/eprint/402
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