Identifying the Real Effects of the M&A Market on Target Firms

Abstract

This paper provides causal evidence of the effects of the M&A market on target firms’ corporate policies. Using antitrust regulatory thresholds to link the probability of a takeover to the size of the firm, we find evidence that firms intentionally reduce their size to elicit a takeover bid. They do so by limiting asset growth and increasing their payouts when they have excess cash. The treatment effect is stronger among firms with greater control over their market value and incentives to cash out via a merger. Our results reveal that antitrust exemptions can create perverse incentives that limit growth.