Working Paper: NBER ID: w8740
Authors: Boyan Jovanovic; Peter L. Rousseau
Abstract: The Q-theory of investment says that a firm's investment rate should rise with its Q. We argue here that this theory also explains why some firms buy other firms. We find that 1. A firm's merger and acquisition (M&A) investment responds to its Q more -- by a factor of 2.6 -- than its direct investment does, probably because M&A investment is a high fixed cost and a low marginal adjustment cost activity, 2. The typical firm wastes some cash on M&As, but not on internal investment, i.e., the 'Free-Cash Flow' story works, but explains a small fraction of mergers only, and 3. The merger waves of 1900 and the 1920's, `80s, and `90s were a response to profitable reallocation opportunities, but the `60s wave was probably caused by something else.
Keywords: No keywords provided
JEL Codes: O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm's q (D25) | M&A investment (G34) |
| firm's q (D25) | direct investment (F21) |
| M&A investment (G34) | cash wastage (D61) |
| merger waves (F12) | profitable reallocation opportunities (D61) |