Abstract

This paper provides evidence of the real effects of financial markets. 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 inter-quartile decrease in valuation leads to a 7 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 which found a weak relation between prices and takeovers without instrumentation. They imply that financial markets may impose discipline on managers by triggering takeover threats. More generally, they demonstrate the bi-directional relationship between asset prices and corporate finance — prices both affect and reflect real decisions.

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Citation

Edmans, Alex, Itay Goldstein, and Wei Jiang. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers." Journal of Finance 67, no. 3 (2012): 933-973.

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