Stock Market Driven Acquisitions

Andrei Shleifer

Harvard University – Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert W. Vishny

University of Chicago – Booth School of Business; National Bureau of Economic Research (NBER)

August 2001

NBER Working Paper No. w8439

Abstract:

We present a model of mergers and acquisitions based on stock market misvaluations of the combining firms. The key ingredients of the model are the relative valuations of the merging firms, the horizons of their respective managers, and the market’s perception of the synergies from the combination. The model explains who acquirers whom, whether the medium of payment is cash or stock, what are the valuation consequences of mergers, and why there are merger waves. The model is consistent with available empirical findings about characteristics and returns of merging firms, and yields new predictions as well.

Stock Market Driven Acquisitions

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