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

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  • ALEX EDMANS
  • ITAY GOLDSTEIN
  • WEI JIANG

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.

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  • Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    • Handle: RePEc:bla:jfinan:v:67:y:2012:i:3:p:933-971
    DOI: 10.1111/j.1540-6261.2012.01738.x
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