Cash‐rich firms are more likely than other firms to attempt acquisitions. Stock return evidence shows that acquisitions by cash‐rich firms are value decreasing. Cash‐rich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cash‐rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Consistent with the stock return evidence, mergers in which the bidder is cash‐rich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanation for acquisitions by cash‐rich firms.

Aggregate merger waves could be due to market timing or to clustering of industry shocks for which mergers facilitate change to the new environment. This study finds that economic, regulatory and technological shocks drive industry merger waves. Whether the shock leads to a wave of mergers, however, depends on whether there is sufficient overall capital liquidity. This macro-level liquidity component causes industry merger waves to cluster in time even if industry shocks do not. Market-timing variables have little explanatory power relative to an economic model including this liquidity component. The contemporaneous peak in divisional acquisitions for cash also suggests an economic motivation for the merger activity.

I investigate the nature of the incentives that lead outside directors to serve stockholders’ interests. Specifically, I document the effect of a takeover bid on target directors, both in terms of its immediate financial impact and its effect on the number of future board seats held by those target directors. Directors are rarely retained following a completed offer. All target directors hold fewer directorships in the future than a control group, suggesting that the target board seat is difficult to replace. For outside directors, the direct financial impact of a completed merger is predominately negative. This documents a cost to outside directors should they fail as monitors, forcing the external control market to act for them. Future seats are related to pre-bid performance. Among outside directors of poorly performing firms, those who rebuff an offer face partial settling-up in the directorial labor market, while those who complete the merger do not.

When the fraction of a firm's cash held overseas is greater, its shareholders value that cash lower. This goes beyond a pure tax effect: the repatriation tax friction disrupts the firm's internal capital market, distorting its investment policy. Firms underinvest domestically and overinvest abroad. Our findings are more pronounced when firms are subject to higher repatriation tax rates, higher costs of borrowing, and more agency problems. Overall, our evidence suggests that a combination of taxes, financing frictions, and agency problems leads to a valuation discount for foreign cash and documents real effects of how foreign earnings are taxed.

Firm values can substantially change between the time deal terms are set and the actual deal closing, risking renegotiation, or termination. We find increases in market volatility decrease subsequent deal activity, but only for public targets subject to an interim period. The effect is strongest when volatility is highest, for deals taking longer to close, and for larger targets. Merging parties attempt to shorten the interim window as risk increases. Firmand industry-level uncertainty measures reveal similar findings, ruling out an unobserved macro variable. We conclude interim uncertainty contributes to understanding the timing and intensity of public firms' merger activity.

Cash‐rich firms are more likely than other firms to attempt acquisitions. Stock return evidence shows that acquisitions by cash‐rich firms are value decreasing. Cash‐rich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cash‐rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Consistent with the stock return evidence, mergers in which the bidder is cash‐rich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanation for acquisitions by cash‐rich firms.

We examine the importance of indexing, industry, and broad market forces in driving common effects in order flow, returns, and trading costs. Common effects are strong for order flow and returns in a sample of S&P 500 stocks, but are weak in a sample of non-index stocks and for trading costs in both samples. Industry and broad market effects exist in order flow for both samples, but indexing effects are dominant. Correlated order flow drives common effects in returns and, to a lesser extent, those in trading costs. An event study of the effect of index addition on order flow and return comovement reinforces these conclusions. Our results show that common effects are not pervasive and have implications for diversification strategies and price formation models.

Both risk management and payout decisions affect a firm's financial flexibility—the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and nonfinancial firms. We find that a more flexible distribution, favoring repurchases over dividends, is negatively related to financial hedging within a firm, consistent with financial flexibility in payout decisions and hedging being substitutes. Our findings, which are robust to controlling for the endogeneity of hedging and payout choices, suggest that payout flexibility offers operational hedging benefits.

Prior research has shown that differential access to debt markets significantly affects capital structure. In this paper, we examine the effect of access to debt markets on investment decisions by using debt ratings to indicate bond market access. We find that rated firms are more likely to undertake acquisitions than nonrated firms. This finding remains even after accounting for firm characteristics, for the probability of being rated, and in matched sample analysis as well as in subsamples based on leverage, firm size, age and information opacity. Rated firms also pay higher premiums for their targets and receive less favorable market reaction to their acquisition announcements relative to non-rated firms. However, the average announcement returns to rated acquirers are non-negative. Collectively, these findings suggest that the lack of debt market access has a real effect on the ability to make investments as well as on the quality of these investments by creating underinvestment, instead of simply constraining overinvestment.

We represent the economy as a network of industries connected through customer and supplier trade flows. Using this network topology, we find that stronger product market connections lead to a greater incidence of cross‐industry mergers. Furthermore, mergers propagate in waves across the network through customer‐supplier links. Merger activity transmits to close industries quickly and to distant industries with a delay. Finally, economy‐wide merger waves are driven by merger activity in industries that are centrally located in the product market network. Overall, we show that the network of real economic transactions helps to explain the formation and propagation of merger waves.