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Abstract

How does the market for corporate control reallocate firm ownership in response to adverse aggregate financial shocks? To answer this question, we develop a tractable model of mergers and acquisitions (M&As) where firms facing different degrees of financial constraints acquire ownership of illiquid domestic firms. We show that acquisitions by financially constrained acquirers, on average, involve higher ownership stakes and post-acquisition survival rates when faced with adverse aggregate financial shocks, in comparison to acquisitions by unconstrained firms. This effect operates through two margins: An intensive margin (dominant for constrained acquirers) that works through a higher average productivity of acquirer-target matches, and an extensive margin (dominant for unconstrained acquirers) that operates thorough an increase in the proportion of fire-sale acquisitions in the economy. We provide evidence supportive of the predictions of the model in a large data set of M&As in emerging market economies. Our theoretical results provide insight into our novel empirical findings of a change in the degree of control acquired by and a convergence of survival rates between domestic and foreign acquisitions during financial crises, and point to the existence of a “cleansing effect” in the market for corporate assets.

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