The Perverse Valuation Effect on Mergers and Acquisitions in Europe

Abstract

We investigate the macroeconomic and financial determinants of mergers and acquisitions (M&A) in Europe and address the gap in understanding how financial market dynamics influence corporate decisions. While previous literature has examined macroeconomic factors affecting M&A, the impact of (10-year government) bond yields remains underexplored. We fill this gap using panel data of 21 European Union Countries over 2006:Q1–2022:Q2. Across different model specifications we find that bond yields and real gross domestic product growth are robust determinants of M&A, even after controlling for other determinants. A novelty of our study is that rising and higher bond yields are associated with a reduction in M&A activity because investors are shifting their portfolios out of bonds and into riskier assets like equities, thereby increasing acquisition costs. We denote this as a “perverse valuation effect” offering new insights into M&A dynamics.