Rival Reactions – Do Value-Increasing Mergers Bolster Monopoly Rents for Strong Rivals?

Abstract

Mergers and acquisitions (M&As) are major events, potentially reshaping competition among industry rivals. Despite their seeming importance, the existing literature reports only a limited impact of M&As on the competitive environment. Our paper revisits this issue using a novel approach that characterizes the intensity and the nature of industry peers interactions. Using idiosyncratic return co-movements, we filter out unrelated firms and distinguish business partners from competitors. We then study rival reactions to horizontal M&A announcements conditionally on their status (business partners versus competitors). The results suggest that M&As dampen competition; this represents the first large scale empirical support for the market power hypothesis.

Keywords: Mergers and acquisitions, industry rivals, market power, competitive pressure