Monetary Policy and Mergers & Acquisitions (with Wolfram Horn)
We analyse the effect of monetary policy on mergers and acquisitions (M&A) activity in the United States, exploiting aggregate data as well as detailed information on M&A transactions and the financial statements of U.S. publicly listed companies. We find that aggregate M&A activity decreases significantly in response to an increase in interest rates. We confirm this result on the firm level: the probability that a given firm in our sample announces the acquisition of another firm, its “acquisition likelihood”, decreases significantly following an interest rate increase. The acquisition likelihood falls significantly more for relatively more financially constrained firms, suggesting a strong role for a credit channel of monetary policy transmission to firms’ M&A decisions. M&A transactions are, on average, associated with positive abnormal returns for the acquiring firm, suggesting that expansionary monetary policy can facilitate beneficial capital reallocation by enabling more M&A activity. At the margin, however, expansionary monetary policy leads to lower average abnormal returns as more constrained firms engage in M&A. We rationalise these findings in a stylised partial-equilibrium model.
(To be) Presented at: International Panel Data Conference 2021, EcoMod 2021, 10th PhD Student Conference on International Macroeconomics, European Economics and Finance Society 2021 Annual Conference, VfS Annual Conference 2021, DGF Annual Conference 2021