The Q-Theory of Mergers / Boyan Jovanovic, Peter L. Rousseau.

Format:

Book

Author/Creator:

Jovanovic, Boyan.

Contributor:

National Bureau of Economic Research.

Rousseau, Peter L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8740.

NBER working paper series no. w8740

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

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.

Notes:

Print version record

January 2002.