Influence of Economic Cycles on Effectiveness of M&A Deals

Mergers and acquisitions (M&A) are one of the key research areas in corporate finance. As several studies have shown, M&A presents cyclical changes with a causal and synchronic relation to the economic cycle. However, the literature focusing on the relationship between macroeconomic factors and the effectiveness of such type of deals is lacking. This empirical research examines the influence of economic cycles on the effectiveness of M&A in order to identify the best stage for making the deal in the developed market. Two different methods of determining economic cycles and the impact on the investors' responses provided by each of them were considered. The use of cumulative abnormal return (CAR) as an indicator of transaction effectiveness makes it possible to measure changes in the value of companies as a result of mergers and acquisitions in the short term. The study is based on a sample of 848 acquirers in the developed US market. The analysis of the time period from 2002 to 2019 covers two M&A waves and several economic crises, which allows to consider the issue fully. The results suggest that the economic cycle described by the dynamics of the stock index reflects the investors’ behavior and the changes in the macroeconomic situation most accurately, while the completion of the deal at the growth stage contributes to maximum efficiency.