Bargaining Power in the Presence of Financial Market Constraints

Abstract

This paper examines how financial market stress affects value creation and distribution when firms merge. We measure the level of systemic financial market stress by using the St. Louis Fed Financial Stress Index (STLFSI). We find that the combined gain to shareholders (acquirer plus target) is related negatively to the STLFSI. With regard to the distribution of the gain, we find that financial market stress does not affect the relative bargaining power of the acquiring- and target-firm managers. However, acquiring-firm managers do lose bargaining power when they cite an increase in shareholder liquidity as a motivation for the merger.