Merger Activity, Stock Prices, and Measuring Gains from M&A

Fitting aggregate merger data to a stylized model, we estimate 10-15% of aggregate stock market valuation can be attributed to broad anticipation of mergers. Accordingly, exogenous shifts in deal activity lead to significant changes in aggregate price levels. In empirical tests, every additional dollar of announced merger premiums is associated with up to $40 dollars of increased aggregate market valuation over the following week. Changes in deal activity have broad effects on returns across industries, exchanges, and firm types. Large embedded merger premiums imply traditional event study methods used in M&A research significantly underestimate merger synergies and premiums. Lastly, we show part of the observed link between stock prices and merger activity comes from increased deal activity inducing higher prices, as opposed to the general assumption that higher prices induce more merger activity.