← Search

Journal of Finance Vol. 67 No. 3 2012

The Real Effects of Financial Markets: The Impact of Prices on Takeovers

Alex Edmans1,2,3; Itay Goldstein4; Wei Jiang5

1 London School of Business and Finance · 2 Centre for Economic Policy Research · 3 London Business School · 4 University of Pennsylvania · 5 University of Hong Kong

open access

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.

DOI
10.1111/j.1540-6261.2012.01738.x
Volume
67
Issue
3
Pages
933-971
Language
en
Sources
openalex bibtex:phds-export.bib crossref

Cite