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Journal of Financial Economics 77 (2005) 529–560 www.elsevier.com/locate/jfec What drives merger waves?$
Jarrad HarfordÃ
University of Washington Business School, Box 353200, Seattle, WA 98195-3200, USA
Received 5 December 2003; accepted 24 May 2004
Available online 4 January 2005

Abstract
Aggregate merger waves could be due to market timing or to clustering of industry shocks for which mergers facilitate change to the new environment. This study finds that economic, regulatory and technological shocks drive industry merger waves. Whether the shock leads to a wave of mergers, however, depends on whether there is sufficient overall capital liquidity.
This macro-level liquidity component causes industry merger waves to cluster in time even if industry shocks do not. Market-timing variables have little explanatory power relative to an economic model including this liquidity component. The contemporaneous peak in divisional acquisitions for cash also suggests an economic motivation for the merger activity. r 2004 Elsevier B.V. All rights reserved.
JEL classification: G34
Keywords: Mergers and acquisitions; Takeover; Merger waves; Behavioral; Capital liquidity

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I thank John Chalmers, Larry Dann, Harry DeAngelo, Vidhan Goyal, Alan Hess, Jon Karpoff, Paul
Malatesta, Wayne Mikkelson, Harold Mulherin, Ed Rice, Husayn Shahrur, an anonymous referee, and seminar participants at Babson College, Penn State, Purdue, Vanderbilt, Duke, the Universities of
Arkansas, Southern California, and Utah, the University of Oregon research roundup, the 2001 Pacific
Northwest Finance Conference, and the 2004 AFA meetings for comments. Sandy Klasa provided excellent research assistance. I gratefully acknowledge the contribution of Thomson Financial for providing earnings per share forecast data, available through I/B/E/S. This paper is partially derived from an earlier paper that circulated under the title, ‘‘Efficient and distortional components

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