The real effects of financial markets: The impact of prices on takeovers
Journal
Journal of Finance
Subject
Finance
Publishing details
Authors / Editors
Edmans A;Goldstein I;Jiang W
Biographies
Publication Year
2012
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.
Available on ECCH
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