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How Central Bank Financial Repression Has Fueled Value-Destroying M&A Deals

Summary:
Nevertheless, as Bayer-Monsanto shows, that takeovers can turn sour, even if they are credit-financed. One reason could be that since the late 1980s central banks have undermined the disciplinary role of debt by pushing interest rates to ever lower levels. With interest rates near zero and not being expected to rise, managers without internal funds can rely on cheap large-scale external funds to increase the firm size even if no significant efficiency gains are achieved. Hoffmann and Schnabl (2016) have argued that the persistently benign liquidity conditions created by central banks have released the pressure on enterprises for efficiency gains and innovation. Once, Kornai (1986) dubbed similar

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Nevertheless, as Bayer-Monsanto shows, that takeovers can turn sour, even if they are credit-financed. One reason could be that since the late 1980s central banks have undermined the disciplinary role of debt by pushing interest rates to ever lower levels. With interest rates near zero and not being expected to rise, managers without internal funds can rely on cheap large-scale external funds to increase the firm size even if no significant efficiency gains are achieved. Hoffmann and Schnabl (2016) have argued that the persistently benign liquidity conditions created by central banks have released the pressure on enterprises for efficiency gains and innovation. Once, Kornai (1986) dubbed similar pattern for the central and eastern European planning economies as “soft budget constraints”.

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David Stockman
David Alan Stockman (born November 10, 1946) is a former businessman and U.S. politician who served as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.

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