Purpose: Economic uncertainty affects mergers and acquisitions (M&As); however, there is limited evidence regarding its effect on the propensity to acquire privately held versus publicly traded companies, as well as how institutional factors influence such decisions. I hypothesize that economic uncertainty and financial market development influence the preferences for the type of acquisition targets. Design/methodology/approach: Using a sample of European M&A transactions and employing both measures of economic uncertainty and the uncertainty spike resulting from the pandemic, as well as the degree of financial market development, I test whether these factors are associated with the frequency of acquisitions involving privately held companies, further distinguishing between stand-alone private firms and subsidiaries.
Findings: My analysis indicates that, under market uncertainty, acquisitions of publicly traded company diminish, while transactions involving privately held companies increase. Furthermore, I demonstrate that the COVID-related spike in uncertainty generates an additional effect beyond general economic uncertainty. I also find that the positive association between uncertainty and acquisitions of privately held companies particularly applies to stand-alone private firms rather than subsidiaries. My findings also reveal that acquisitions of private companies are more likely in financially developed markets.
Originality/value: This study contributes to the literature on the effects of economic uncertainty on M&As by highlighting the importance of uncertainty in shaping the relative frequency of acquisitions involving private versus public companies, while also emphasizing the significance of institutional factors in influencing such preferences. Moreover, my research enhances the understanding of privately held firms, whose specificities have largely been neglected in the academic debate.
Keywords: M&A, private companies, economic uncertainty
