Working Paper: NBER ID: w17463
Authors: Asli M. Arikan; Ren M. Stulz
Abstract: Lifecycle theories of mergers and diversification predict that firms make acquisitions and diversify when their internal growth opportunities become exhausted. Free cash flow theories make similar predictions. In contrast to these theories, we find that the acquisition rate of firms (defined as the number of acquisitions in an IPO cohort-year divided by the number of firms in that cohort-year) follows a u-shape through their lifecycle as public firms, with young and mature firms being equally acquisitive but more so than middle-aged firms. Firms that go public during the merger/IPO wave of the 1990s are significantly more acquisitive early in their public life than firms that go public at other times. Young public firms have a lower acquisition rate of public firms than mature firms, but the opposite is true for acquisitions of private firms and subsidiaries. Strikingly, firms diversify early in their life and there is a 41% chance that a firm's first acquisition is a diversifying acquisition. The stock market reacts more favorably to acquisitions by young firms than to acquisitions by mature firms except for acquisitions of public firms paid for with stock. There is no evidence that the market reacts more adversely to diversifying acquisitions by young firms than to other acquisitions.
Keywords: No keywords provided
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm age (L10) | acquisition behavior (G34) |
| acquisition rates (G34) | lifecycle of firms (D25) |
| market conditions (P42) | acquisition activity (G34) |
| IPO underpricing (G24) | acquisition rates (G34) |
| young firms (M13) | diversifying acquisitions (G34) |
| firm age (L10) | market reaction to acquisitions (G34) |
| young firms acquiring public firms (G34) | adverse market reaction (E44) |