Experience Matters: The Impact of the Financial Crisis on M&A

I have been stumped by the continued low level of M&A activity. Despite improving fundamentals, strong stock market performance and the need for many industries to consolidate, M&A remains stuck in low gear. I understand macro headwinds and political uncertainty still exist. Nonetheless, something else seems to be dogging managerial animal spirits. My concern is the 2008 Financial Crisis may have a long term damping effect on management risk appetite.

The Financial Crisis represented a near death experience for many firms. Stock prices fell by 50%.  Although they have largely recovered over the past 5 years the cumulative return over that period remains flat. The collective memory of this experience may take years to dissipate.   Experiences matter - sometimes even more than fundamentals. Risk tolerance is time varying. Thus, the financial crisis is likely to have a long term negative impact on managers’ willingness to engage in M&A.  See a book chapter I authored on this subject chapter_24_post_crisis_investor_behavior_-_rizzi_-_final_-_05-18-13.pdf.

J