Market Returns and Interim Risk in Mergers

A primary concern in mergers and acquisitions is the risk the deal may be cancelled before it is completed. We document that this ``interim risk" varies asymmetrically with the aggregate market return. Deals paid in cash tend to be renegotiated when the market rises but cancelled when the market crashes. There is no such effect for deals paid in stock, consistent with a mechanism of costly renegotiation. Variation in interim risk over time affects the market for corporate control, altering the method of payment and the firms that are targeted and acquired