Article | Journal of Finance | December 2004

Market Valuation and Merger Waves

by Matthew Rhodes-Kropf and S. Viswanathan

Abstract

Does valuation affect mergers? Data suggest that periods of stock merger activity are correlated with high market valuations. The naïve explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over- and undervaluation of the stock market. Thus, valuation fundamentally impacts mergers.

Keywords: Mergers and Acquisitions; Valuation; Market Transactions; Value; Cash; Stocks; Corporate Social Responsibility and Impact; Bids and Bidding; Market Design; Stock Shares; Accounting Audits; Performance Evaluation;

Citation:

Rhodes-Kropf, Matthew, and S. Viswanathan. "Market Valuation and Merger Waves." Journal of Finance 59, no. 6 (December 2004): 2685–2718.