Monetary policy and merger performance in China

This study examines the impact of monetary conditions on merger performance in China. We find robust evidence that mergers announced in periods of monetary expansion experienced significantly lower stock market returns. This negative effect is particularly pronounced for cash-financed deals and for deals with acquirers that have poor growth prospects and weak corporate governance. Monetary easing does not disproportionately improve financially constrained firms’ credit access. Our findings are consistent with the overinvestment hypothesis rather than the financial constraint hypothesis. Furthermore, we propose a preemptive merger motive to explain the observed divergence between short-term market returns and long-term operating performance.