Can M&A activities act as a predictor of the performance of economic growth or stock prices?

- The paper employs panel data analyses with 30-year data from six OECD countries.
- We find a significant one-way causal relationship from stock prices to M&A activities.
- We find no special lead-lag relationships between economic growth and M&A activity.
- The paper uses Kónya's (2006) trivariate method to analyze the panel data causality.
- We also consider cross-sectional dependency and slope heterogeneity simultaneously.

One of the important issues with regard to the relationship between M&As (mergers and acquisitions) and economic growth or stock prices is whether such activities can act as a predictor of these two variables' performance, or whether these variables have resulted in significant impacts on M&A activities. The aim of this paper is to use the method proposed in Kónya (2006) to carry out a causality test among M&A activities, economic growth and stock prices, because the causal relationships that may be uncovered by this would be meaningful for both policymakers and stockholders. This paper uses quarterly data from six OECD countries for the period from April 1980 to March 2010. The bootstrap panel Granger causality test that this work applies also considers cross-sectional dependency and slope heterogeneity simultaneously. The findings of the paper are as follows. There is significant, one-way causality from stock prices to M&A activities, and thus changes in stock prices lead M&A activities. With real GDP as the control variable, for all the countries surveyed, except Australia, stock prices lead M&A activities. As for the impact that economic growth has on M&A activities, we conclude that, when using stock prices as the control variable, there is almost no lead-lag relationship between economic growth and M&A activities, except for in Japan.