Mergers and Acquisitions: The Role of Ambiguity

Abstract

Firms that face high ambiguity—Knightian uncertainty—reduce organic investments and increase the likelihood, count, and dollar value of merger and acquisition bids. Conversely, firms that face low ambiguity are likely targets. The probability and speed of deal completion increase in the spread between bidder and target ambiguity. All-stock deals are less likely when bidders face high ambiguity, and all-cash deals are less likely when targets face high ambiguity. Bidder ambiguity declines following deal completion, and bidders that face higher ambiguity have larger abnormal announcement returns that decrease in target ambiguity.