Acquiring growth
Estimating several measures of performance, I find that rather than being "bad" firms as in the neoclassical or q-theory of mergers, targets are highly productive at generating revenue, have high investment rates and revenue growth, and above average market-to-book ratios. However, targets suffer from high operating costs. To explain these empirical findings, I develop a model of mergers in which the transfer of growth options is an important motivation for takeover. Firms which have valuable growth opportunities but are impaired by high operating costs are endogenously targeted for takeover. In contrast, acquirers are firms with low operating costs that lack sufficient internal growth opportunities. Low-cost producers seek to acquire firms with good projects which are not fully implemented due to high costs, generating gains from reallocation. The empirical facts I document are reconciled in the calibrated model. Furthermore, in my model acquirers are firms with temporarily high free cash flows even in the absence of agency conflicts, and value-creating mergers naturally lead to a drop in profitability.
Year of publication: |
2011-01-01
|
---|---|
Authors: | Levine, Oliver J |
Publisher: |
ScholarlyCommons |
Subject: | Finance |
Saved in:
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