Topic:Why Are Underperforming Firms Rarely Acquired?
Speaker:Wenyu Wang, Indiana University
Time:Wednesday, 5 July, 10:00-11:30
Place:Room 217, Guanghua Building 2
Only 5% of underperforming firms are acquired each year. We estimate a dynamic model to evaluate how different motives and frictions in takeover market contribute to this low rate of acquisitions. Our estimates suggest that managerial control benefit is modest on average but differ much across firms, rendering a significant fraction of value-enhancing deals to be blocked. Though productivity gain appears large in observed takeovers, it is not pervasive in the economy, limiting the scope of value creation. Merger gains are partially anticipated and priced into firms’ pre-acquisition market value, raising the hurdle for underperforming firms to be acquired. Implicit takeover threat disciplines managers and it partly substitutes takeovers in rescuing underperforming firms. Our model predicts that 26% of underperforming firms would be acquired per annum if all forces studied in this paper are eliminated.
Dr. Wenyu Wang is an Assistant Professor of Finance in Kelley School of Business, Indiana University. His research interests are Corporate Finance, Asset Pricing and Macro Finance. He holds a B.S. in Computer Engineering from Tsinghua University, He holds a M.S. in Quantitative Economics and a Ph.D. in Financ from University of Wisconsin – Madison.
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