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Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions

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  • Duchin, Ran
  • Schmidt, Breno
Abstract
We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts' forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.

Suggested Citation

  • Duchin, Ran & Schmidt, Breno, 2013. "Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions," Journal of Financial Economics, Elsevier, vol. 107(1), pages 69-88.
    • Handle: RePEc:eee:jfinec:v:107:y:2013:i:1:p:69-88
    DOI: 10.1016/j.jfineco.2012.07.003
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    More about this item

    Keywords

    Mergers and acquisitions; Governance; Merger waves; Turnover; Uncertainty;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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