Because firms’ takeover motives are unobservable to investors, mergers are only partially anticipated and often appear as mixed blessings for acquirers. I construct and estimate a model to study the causes and consequences of bid anticipation and information revelation in mergers. Controlling for the market’s reassessment of the acquirer’s stand-alone value, I estimate that acquirers gain 4% from a typical merger. The total value of an active merger market averages 13% for acquirers, part of which is capitalized in their pre-merger market values. My model also explains the correlation between announcement returns and firm characteristics, as well as the low predictability of mergers.

High expected inflation is known to predict low future real growth. We show that, relative to nondurable goods sectors of the economy, such predictability is significantly more pronounced in durable sectors. Consistent with this macroeconomic evidence, the equity returns of durable goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a two-good recursive utility model that features persistent growth fluctuations and inflation nonneutrality for durable and nondurable consumption. Our model can quantitatively account for the levels and volatilities of bond and equity prices, and correlations of equity returns with bond returns and with expected inflation.

We examine how labor power affects a firm’s takeover exposure and merger gains. Using a regression discontinuity design that relies on “locally” exogenous variation in labor power generated by close-call union elections, we find that increased labor power significantly reduces a firm’s takeover exposure, reduces target offer premium and announcement returns, and prolongs deal completion duration. The results are stronger for more powerful and conflict-provoking unions. Bidders of unionized targets are experienced, are tough negotiators, and face fewer union threats by themselves. Our paper provides new insights into the real effects of shareholder-employee conflict regarding the market for corporate control. (JEL G34, G30, J51) Received: February 9, 2019; editorial decision January 15, 2020 by Editor Isil Erel. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Do informed shareholders who can influence corporate decisions improve governance? We demonstrate this may not be generally true in a model of takeovers. The model suggests that a shareholder’s ability to collect information and trade ex post may cause him, ex ante, to support pursuing value-destroying takeovers or oppose value-enhancing takeovers. Surprisingly, we find conditions under which giving the active shareholder greater influence weakens governance and reduces firm value, even if such influence power can be used to reject bad takeovers ex post. Our model sheds light on the limitations of relying on informed, active shareholders to improve governance.

How and to what extent do managerial control benefits shape the efficiency of the takeover market? We revisit this question by estimating both the dark and bright sides of managerial control benefits in an industry equilibrium model. On the dark side, managers’ private benefits of control distort firms’ takeover incentives and hinder the reallocation role of the takeover market. On the bright side, fear of a takeover induces underperforming managers to exert more effort and enhances the disciplinary role of the takeover market. Our estimates suggest that the bright-side effect increases the value created by an active takeover market by 21%, comparable in magnitude to the dark-side effect. It is also important to account for this bright-side effect in explaining certain features of the takeover market, including a low takeover-performance sensitivity.

If opportunistic acquirers can buy targets using overvalued shares, then there is an inefficiency in the merger and acquisition (M&A) market: the most overvalued rather than the highest-synergy bidder may buy the target. We quantify this inefficiency using a structural estimation approach. We find that the M&A market allocates resources efficiently on average. Opportunistic bidders crowd out high-synergy bidders in only 7% of transactions, resulting in an average synergy loss equal to 9% of the target’s value in these inefficient deals. The implied average loss across all deals is 0.63%. Although the inefficiency is small on average, it is large for certain deals, and it is larger when misvaluation is more likely. Even when opportunistic bidders lose the contest, they drive up prices, imposing a large negative externality on the winning synergistic bidders.

Constructing a comprehensive data set of financially distressed firms that restructured their debts from 2000–2014, we find that firms with financial institutions’ loan-equity simultaneous holdings are more likely to restructure out of court than to file for bankruptcy. The effect is stronger when loans are oversecured and when the expected bankruptcy costs are larger. We use mergers of financial institutions and instrumental variable estimations to address potential endogeneity concerns. Firms with simultaneous holdings experience higher stock returns. The evidence suggests that mitigating shareholder-creditor conflict results in cost-effective resolutions of financial distress.

ABSTRACT Errors and bias are both inherent features of accounting. In theory, while errors discourage bias by lowering the value relevance of accounting, they can also facilitate bias by providing camouflage. Consistent with theory, we find a hump‐shaped relation between a firm's propensity to engage in intentional misstatement and the prevalence of unintentional misstatements in the firm's industry for the whole economy and a majority of the industries. The result is robust to using firms’ number of items in financial statements and exposure to complex accounting rules as alternative proxies for errors and to using the restatement amount in net income to quantify the magnitude of bias and errors. To directly test for the two effects of errors, we show that when errors are more prevalent, the market reacts less to firms’ earnings surprises and bias is more difficult to detect. Our results highlight the imperfectness of accounting, advance understanding of firms’ reporting incentives, and shed light on accounting standard setting.

How does firm-specific human capital shape careers in the finance industry? We build a dynamic model where workers accumulate portable and nonportable (firm-specific) human capital and learn about their match quality with employers. Estimating the model using granular data on M&A advisory bankers, we show that a large fraction of bankers’ human capital is nonportable, ranging from 12% to 46% across different firm types. Bankers make a dynamic trade-off between portability and returns on human capital, leading to time-varying job preferences over their life cycle. Our results have broad implications for careers in finance and the provision of financial services.

High expected inflation is known to predict low future real growth. We show that, relative to nondurable goods sectors of the economy, such predictability is significantly more pronounced in durable sectors. Consistent with this macroeconomic evidence, the equity returns of durable goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a two-good recursive utility model that features persistent growth fluctuations and inflation nonneutrality for durable and nondurable consumption. Our model can quantitatively account for the levels and volatilities of bond and equity prices, and correlations of equity returns with bond returns and with expected inflation. Received January 25, 2012; accepted July 13, 2015 by Editor Geert Bekaert.