Atreya Chakraborty

Waves and persistence in merger and acquisition activity

Does merger and acquisition (M&A) activity occur in waves, that is, are there oscillations between low and high levels of M&A activity? The answer to this question is important in developing univariate as well as structural models of explaining and forecasting the stochastic behavior of M&A activity. There is evidence to suggest that aggregate U.S. time-series data on merger and acquisition (M&A) activity exhibit a wave behavior, which has been modeled by fitting either a two-state Markov switching-regime model or a sine-wave model to the data. This study provides an alternative characterization of the temporal patterns in M&A as a nonlinear process with strongly persistent or long-memory dynamics. The apparent level changes or partial cycles of differing magnitudes in aggregate M&A time series are consistent with an underlying data generating process exhibiting long memory. Time- and frequency-domain estimation methods are applied to a long M&A time series constructed by Town (1992), covering approximately a century of merger activity in the U.S. economy. We find significant evidence of long-term cyclical behavior, nonperiodic in nature, in the M&A time series, even after accounting for potential shifts in the mean level of the series. A shock to M&A activity exhibits significant persistence as it is damped at the very slow hyperbolic rate, but it eventually dissipates. We provide both theoretical and empirical rationales for the presence of fractional dynamics with long-memory features in M&A activity. Theoretically, long-term dependence may be due to persistent differences in firm valuation between stockholders and nonstockholders following an economic disturbance, as suggested by Gort (1969). Empirically, long-memory dynamics in M&A activity may reflect the statistical properties of fundamental factors underlying its behavior, as several of the proposed determinants of M&A activity have been shown to exhibit strong persistence.

Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums

A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test--the Johansen likelihood ratio (JLR) test--to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.

The forward rate unbiasedness hypothesis reexamined: evidence from a new test

Under conditions of risk neutrality and rational expectations in the foreign exchange market, there should be a one-to-one relationship between the forward rate and the corresponding future spot rate. However, cointegration-based tests of the unbiasedness hypothesis of the forward rate have produced mixed findings. In order to exploit significant cross-sectional dependencies, we test the unbiasedness hypothesis using a new multivariate (panel) unit-root test, the Johansen likelihood ratio (JLR) test, which offers important methodological advantages over alternative standard panel unit-root tests. When applied to a data set of eight major currencies in the post-Bretton Woods era, the JLR test provides strong and robust evidence in support of a unitary cointegrating vector between forward and corresponding future spot rates. However, the orthogonality condition is satisfied only for three major currencies.

Ricardian Equivalence: Further Evidence

The Ricardian Hypothesis states that for a given level of government expenditure, aggregate demand is neutral to changes in the debt-to-tax ratio. Many economists argue that the private and government sectors have different planning horizons which will lead to deviations from Richardian equivalence. In this paper, by using a model tat nests both Ricardian equivalence and a alternative hypothesis, we empirically investigate whether the private sector as a shorter planning horizon than the government sector. The evidence presented in this study suggests that there is no difference between the planning horizons of the private and government sectors. [E62]

Intensity of Takeover Defenses: The Empirical Evidence

This paper focuses on the construction of an index of the intensity of firms’ antitakeover defenses. While many aspects of corporate behavior are qualitative in nature, an evaluation of a firm’s stance and the underlying motives for its behavior often depend on the elements of a set of qualitative factors. The interactions beween these factors are likely to have important implications. In this context, only a composite measure will capture these interactions and their implications for firms’ actions. We focus on the creation of an ordinal measure of anti-takeover defenses and utilize the ordered probit estimation technique to relate the magnitude of this measure to the motives for instituting these defenses. Our estimates are generally supportive of the managerial entrenchment hypothesis.