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• W2232705276 abstract "We derive a simple theoretical framework in which acquisitions are treated as an alternative way of obtaining capital goods. Our framework predicts that both investment and acquisitions are positively related to a firm's shadow value of capital. We transform our theoretical specification into an econometric model, which we then estimate using a long panel data-set spanning 503 US firms over 15 consecutive years. Our results indicate that an increase in the shadow value of capital has approximately the same proportionate effect on the level of acquisitions as it does on investment. This result proves to be robust to a variety of alternative specifications. Recent years have witnessed a dramatic increase in the number of corporate takeovers. This tide of activity raises a number of questions about the causes and consequences of acquisitions. What effects do takeovers have on research and development spending? Do takeovers reduce employment? How important are tax considerations in motivating acquisitions? Do management objectives and/or the availability of free cash flow play a role in acquisitions? Although these questions have been addressed in previous research, no specific optimizing model has been put forward to explain the fundamental nature of the acquisition decision.' In this paper we propose such a model. When a firm makes an acquisition, it obtains assets. In this way acquisitions and investment are similar activities, which one might expect to be guided (at least to a substantial extent) by similar economic principles. In this paper we specify and estimate a simple model that explicitly links a firm's acquisition activities to its investment choices. The only unusual feature of this model is that these goods can be either purchased directly (investment) or obtained by taking over another firm (acquisitions). Our model is based on the firm's intertemporal optimization problem under what are, with this one exception, standard assumptions. Our specification yields a pair of equations in which a firm's choices regarding acquisitions and investment are jointly determined and are influenced by the shadow value of capital. As in many models of investment, we assume that firms face convex costs of adjusting their capital stocks. Consequently, the shadow value of capital may exceed its replacement cost. Firms for which the shadow value of capital is high relative to its purchase price will have an incentive to make relatively large capital purchases in relation to their existing capital stock. Under standard assumptions, the shadow value of capital is reflected in the firm's stock market" @default.
• W2232705276 created "2016-06-24" @default.
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• W2232705276 date "2002-08-01" @default.
• W2232705276 modified "2023-09-27" @default.
• W2232705276 title "Acquisitions and Investment" @default.
• W2232705276 hasPublicationYear "2002" @default.
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