Market Valuation and Merger Waves




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    • Matthew Rhodes-Kropf and S. Viswanathan are with Columbia University and Duke University, respectively. We thank Michael Bradley, Espen Eckbo, Larry Glosten, Pete Kyle, Augustin Landier, Costis Maglaras, Jan Mahrt-Smith, Mit Mehta, Michael Riordan, David T. Robinson, Tano Santos, and Daniel Wolfenzon for useful discussions. The anonymous referee's comments have improved the paper considerably. We thank participants at the American Finance Association, Columbia University, Duke University, London Business School, National Bureau of Economic Research, Oxford University, Rutgers University, and Stanford University workshops for insightful comments. All errors are our own.


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.