The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu The leading online blog in the fields of corporate governance and financial regulation. Sun, 31 May 2026 11:30:19 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.8 https://corpgov.law.harvard.edu/wp-content/uploads/2024/02/cropped-photography-4-e1706898544564-1-32x32.png The Real Effects of Financial Markets – The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu 32 32 The Real Effects of Financial Markets https://corpgov.law.harvard.edu/2012/02/08/the-real-effects-of-financial-markets/?utm_source=rss&utm_medium=rss&utm_campaign=the-real-effects-of-financial-markets https://corpgov.law.harvard.edu/2012/02/08/the-real-effects-of-financial-markets/#comments Wed, 08 Feb 2012 14:39:28 +0000 http://blogs.law.harvard.edu/corpgov/?p=25369?d=20150105140423EST Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday, February 8, 2012
Editor's Note:

The following post comes to us from Alex Edmans and Itay Goldstein, both of the Department of Finance at the University of Pennsylvania, and Wei Jiang, Professor of Finance at Columbia University.

In our paper, The Real Effects of Financial Markets: The Impact of Prices on Takeovers, forthcoming in the Journal of Finance, we provide evidence on the real effect of financial markets. Using non-fundamental shocks to market prices — occurring due to non-discretionary trades by mutual funds that face liquidation pressure from investors’ outflows — as an instrumental variable, we show that market prices affect takeover activity. A non-fundamental decrease in the stock price creates a profit opportunity for acquirers, and increases the probability that the firm will be taken over. Using an instrument for price changes is essential for identifying this effect since market prices are endogenous and reflect the likelihood of an upcoming acquisition. This may explain the weak relationship between prices and takeover activity found by prior literature. By modeling the relationship between prices and takeovers as a simultaneous system that accounts for anticipation, and identifying using an instrument, we find a significantly stronger effect of prices on takeovers than previous research.

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