When a rival stumbles: Misconduct spillovers as an acquisition catalyst

We examine how corporate misconduct affects merger and acquisition (M&A) activity of non-prosecuted peer firms. We find that exposure to peer misconduct increases the propensity to participate in M&A transactions, both as an acquirer and as a target. Firms exposed to peer misconduct experience adverse financial and valuation pressures, creating opportunities for financially stronger firms to acquire distressed rivals at discounted prices. We show that acquisitions involving targets exposed to peer misconduct are characterized by lower takeover premiums, a higher fraction of stock payment, higher acquirer announcement returns, and greater deal synergies. Overall, the evidence supports the view that misconduct spillovers disproportionately affect targets through heightened regulatory pressures and compliance costs, shifting bargaining power toward acquirers in M&A transactions.