| Summary: | In this thesis, I present three essays on the interaction of two dynamic aspects of mergers and acquisitions. First, merger activity follows waves within industries over time. Second, acquirers' announcement returns are on average small and decline within merger waves. In the first essay, I develop a model of merger waves to study the interplay between merger timing and market anticipation of deal announcements. I show that the pattern of small and declining announcement returns for acquirers in merger waves is consistent with the notion that the market learns over time and is thus able to better anticipate deal announcements. This explanation contrasts with existing theories which attribute the declining pattern in announcement returns to a decline in deal quality. The model delivers several predictions about time-series and cross-section aspects of acquirers' stock returns during merger wave episodes. In the second essay, I test a set of the model's predictions. As a testing laboratory, I use four industries that underwent merger deregulations in the 1990s. Consistent with existing theories, high quality deals tend to be announced early in a merger wave. However, I show that this pattern in deal quality does not explain the declining pattern in acquirers' announcement effects. Consistent with the model's predictions, I find that what matters for this pattern is the unexpected portion of deal timing. I also find evidence of contagion effects on acquirers' peers that is consistent with the information channel in the model. In the third essay, I study the drivers of merger waves by examining the allocation of equity proceeds raised at times of high merger activity. My results indicate that firms do not systematically increase debt repayment or equity payout with equity proceeds raised in high merger years. This pattern does not conform with the view that managers believe the stock is overvalued at the time of the equity issue. Instead, the observed pattern of proceeds allocation is consistent with the existence of time-varying adverse selection and investment lags. The evidence supports the idea that these frictions are important elements behind the dynamics of merger and acquisition activity.
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