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The Real Effects of Financial Markets: The Impact of Prices on Takeovers





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    • Edmans is from The Wharton School, University of Pennsylvania, NBER, and ECGI. Goldstein is from The Wharton School, University of Pennsylvania. Jiang is from Columbia Business School. For helpful comments and discussions, we thank the Editor (Cam Harvey), two anonymous referees, an Associate Editor, Jack Bao, Thomas Bates, Jonathan Berk, Philip Bond, Jess Cornaggia, Todd Gormley, Dirk Hackbarth, Ayla Kayhan, Alexander Ljungqvist, Ernst Maug, Konrad Menzel, Randall Morck, Stew Myers, Lalitha Naveen, Gordon Phillips, Michael Roberts, Jacob Sagi, Jeremy Stein, and seminar participants at Columbia, Drexel, Georgia State, HBS, HEC Paris, HKUST, Houston, Mannheim, MIT Sloan, SUNY Binghamton, Temple, Tilburg, UNC, UT Dallas, Yale, AFA, Caesarea Center Conference, FIRS, LSE Paul Woolley Center Conference, NBER, the UBC Summer Conference, and the Washington University Conference on Corporate Finance. Robert Ready and Carrie Wu provided valuable research assistance. Edmans gratefully acknowledges the Goldman Sachs Research Fellowship from the Rodney White Center for Financial Research. This paper was previously circulated under the title “Takeover Activity and Target Valuations: Feedback Loops in 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 interquartile decrease in valuation leads to a seven 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 that finds a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: They impose discipline on managers by triggering takeover threats.