THE FATE OF FIRMS - EXPLAINING BANKRUPTCIES AND MERGERS

Using a unique data set of over 50,000 observations of approximately 16,000 corporations, we test theories that seek to explain which firms become merger targets and which firms go bankrupt. We find that merger activity is much greater during prosperous periods than during recessions. In bad economic times, firms in industries with high bankruptcy rates are less likely to file for bankruptcy than they are in normal years, supporting the market illiquidity arguments made by Shleifer & Vishny (1992). On the firm level we find that low-growth, resource-rich firms are prime acquisition targets and that firms' debt capacity is negatively related to the likelihood of a merger. These results indicate that financial synergy-related variables are important predictors of mergers for the class of firms studied here. Furthermore, we find that among poorly performing firms, the likelihood of merger increases with poorer performance, but among better performing firms, the relation is reversed and chances of merger increase with better performance. Such a changing relation has not been detected in prior merger studies.