Time series explanations of merger activity: some econometric results

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Abstract
Existing papers which have attempted to test explanations of time series patterns in merger behaviour suffer from the defects that, first, they usually consider only one hypothesis and, secondly, none use a moderm econometric methodology. Consequently, their results may be subject to the spurious correlation problem. In this paper we argue that four well-known approaches to explaining time series data in acquisitions (Gort's disturbance theory, King's Trapped Equity model, disequilibrium hypotheses and ad hoc approaches) can all be nested within a capital budgeting decision-making framework. Using a co-integration methodology, a long-run relationship was found between the quarterly number of acquisitions and the growth rate of GDP, Tobin's Q, the balance of payments, the unemployment rate and share prices. Some of the previously proposed theories were found to explain the short-run dynamic variation in acquisition activity. No support was found for Gort's disturbance theory or for King's Trapped Equity model. Conclusions for antitrust policy are suggested.