In this article, we offer an alternative behavioral theory. Shleifer and Vishny (2003, hereafter S&V) hypothesize that many firms become overvalued during a stock market boom, and the managers of these firms undertake mergers to exchange their overvalued shares for real assets. A third theory of merger waves is best characterized as behavioral in that it relaxes the neoclassical assumption of capital market efficiency. Harford (2005) argues that merger waves in the aggregate occur when several industries simultaneously experience shocks that make mergers more profitable. Jovanovic and Rousseau (2002a) extend the q-theory of capital investment into a theory of merger waves caused by well-managed companies with high qs increasing their merger activity. Two make the standard assumptions of neoclassical economics - managers maximize shareholder wealth, capital markets are efficient. Recently, however, a few theories have appeared that claim to account for merger waves. While much research has been done on the causes and effects of mergers, surprisingly little exists on the causes of merger waves. This paper seeks to fill this void by examining merger activity in the United States, the United Kingdom and Continental Europe over the period 1991–2004. Outside of the United States, the United Kingdom and a few other Anglo-Saxon countries little research has been done on mergers, and essentially no studies exist on whether merger waves also occur in non-Anglo-Saxon countries, and if so, whether their causes are the same as in the Anglo-Saxon countries. Merger waves have also occurred in the United Kingdom. Less consensus exists over whether mergers during subsequent waves have been profitable or not. Subsequent US merger waves have also coincided with strong stock market advances, and this pattern can be regarded as a major regularity in aggregate merger data. Perhaps unsurprisingly, therefore, the average merger during the wave proved to be unprofitable ( Hogarty, 1970). 3Īn “impelling force” behind the mergers was “a wave of frenzied speculation in asset values” ( Markham, 1955). Following the first great merger wave that began at the end of the 19th century, several studies tried to explain its causes and effects. Mergers have been a topic of considerable interest in the United States for at least a century.
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