The Real Effects of Financial Markets : The Impact of Prices on Takeovers

Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the quot;trigger effectquot;). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the quot;anticipation effect.quot;) Our results overturn prior literature which found a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: they impose discipline on managers by triggering takeover threats