An Anatomy of Industry Merger Waves

Abstract

We propose a novel Markov regime-switching Poisson regression model with time-varying transition distributions to test existing theories on determinants of wave-like patterns in same-industry merger and acquisitions (M&As). We show that the dynamics and persistence of merger waves change substantially in the cross section of deals flow. Valuation ratios significantly drive transitions towards periods of abnormally high merger activity for most industries. Except few nuances, the empirical analysis demonstrates that while industry-specific economic shocks do not sensibly determine waves in market transactions, deteriorating aggregate economic conditions are expected to be associated with declining M&A activity across industries.