Why do merger premiums vary across industries and over time?

We identify time-varying industry and macroeconomic factors that explain the observed variation in takeover premiums over time. Results support our hypotheses that some industry and economic factors can increase the growth prospects in an industry, which boosts expected synergies and/or demand for the target firm, and therefore increases the merger premiums. Merger premiums are higher when the target's corresponding industry experiences higher growth, has more research and development (a proxy for expected growth), and has less dispersion in performance among firms within the industry. Merger premiums are also positively related to capital liquidity, which can enhance economic growth and competition for target firms, and positively related to volatility in economic growth, which affect merger waves and the demand for target firms over time.

► We identify time-varying industry and macroeconomic factors that explain the observed variation in takeover premiums over time.
► Increased growth prospects in an industry can boost expected synergies and/or demand for the target firm, and therefore increase the merger premiums.
► Merger premiums are also higher when the target's industry has more research and development and has less dispersion in performance among firms within the industry.
► Merger premiums are also positively related to capital liquidity and positively related to volatility in economic growth.