The influence of a highly-valued market on M&A activity

Abstract

Merger and Acquisition decisions are about timing, opportunity, and decision. In the business world, these three words are partially influenced by the strength of the stock market. The timing is when the stock market is highly valued which results in high stock valuation, after that is the opportunity which means to find a target or if an existing target has lower stock valuation and finally comes the decision to make whether to use cash or equity for the transaction. Since companies can use its stock as leverage to acquire companies, a highly valued market gives the companies the resource with which to make purchases. Therefore, the question arises whether the stock market influences the decision for companies to engage in M&A transactions. This question is addressed in this study using a relatively large panel data of M&A activity for the period 2008-2017. The econometric tool used in this study is regression analysis. The measurement that this study used to value the stock market is by measuring the stock market capitalization to GDP ratio of a country. The results displayed that the stock market to GDP ratio is statistically significant at 5% risk on the M&A activity and with a 1% increase in the stock market we expect a 0.1729% increase in the M&A activity. Additionally, the paper suggests the development of a regression model that can measure the FDI inflows in Albania, and this is achieved by adjusting the regression model variables in order to become more suitable for its economy.