Growth Type Matching and Corporate Merger

Description

Recent research has shown that corporate mergers typically take place between firms with similar firm valuations measured by market-to-book ratio or Tobin's Q. This finding is consistent with a matching theory of complements which suggests that the firm valuations are endogenously determined through optimal assortative matching. This project will explore the role of firm growth type in mergers. A firm's growth type can be captured by the firm's growth uncertainty which is largely persistent. Previous research of PI shows that a high (low) growth type firm typically has a high (low) market-to-book ratio and growth uncertainty. Evidence also shows that there is a matching between investment style and the way of financing. For example, firms with higher R&D intensity use more new equity financing, and the investment-financing pattern is well aligned with firm informational environments which are compatible with firm growth types. Since mergers are large investment activities, firm growth type is expected to play an important role in such matching activities. The results of this project would open a new avenue to understand the sources of merger synergies which are important to managers who have to convince the market that their takeover deals make sense.