THE EFFECT OF TAKEOVER ACTIVITY ON INTEREST RATES: FOLKLORE VERSUS FACTS
Abstract
This study develops and tests two hypotheses concerning the effect of takeover activity on interest rates. The first hypothesis is concerned with the effect of bank financed takeovers on interest rates. Folklore has it that the bank credit lines used to carry out large takeovers siphon credit from the financial system and crowd out "legitimate" borrowing for productive investments thereby putting strong upward pressure on interest rates. We call this the "folklore" hypothesis. Another avenue through which takeover activity can affect interest rates is by increasing the aggregate efficiency in the economy. An increase in aggregate efficiency would cause the aggregate production function to shift outwards causing an increase in investment demand. This increase in investment demand would result in higher interest rates. This is the "efficiency" hypothesis. To distinguish the "efficiency" hypothesis from the "folklore" hypothesis, we note that this hypothesis would predict an increase in interest rates on the announcement of any takeover regardless of financing. This study attempts to resolve the above described issues empirically.
Degree
Ph.D.
Subject Area
Finance
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.