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The Real Effects of Financial Markets: The Impact of Prices on Takeovers
Author(s) -
EDMANS ALEX,
GOLDSTEIN ITAY,
JIANG WEI
Publication year - 2012
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2012.01738.x
Subject(s) - anticipation (artificial intelligence) , valuation (finance) , monetary economics , financial market , economics , point (geometry) , business , financial economics , finance , geometry , mathematics , artificial intelligence , computer science
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.