A Dynamic Equilibrium Model of Firm's Life Cycle and Mergers as Efficient Reallocation

42 Pages Posted: 22 Dec 2006

See all articles by Kyriakos Frantzeskakis

Kyriakos Frantzeskakis

University of Wisconsin - Madison

Masako Ueda

University of Wisconsin, Madison - School of Business; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

Any factor that makes acquisition more appealing should increase the number of acquisition that occur. This idea has been captured in standard static models in the literature. However, an increase in the number of acquisitions today means fewer firms exist to perform acquisitions in the future. This dynamic, which we explore, is not well understood. We study a model of mergers motivated by efficient reallocation of projects. A firm may conceive a project that it may not be able to develop successfully. It can be acquired by an established firm that has already proved its ability to develop such projects successfully. We find that, when acquisition costs are low established firms acquire young firms (but not other established firms) in the steady state. More strikingly, if the likelihood of project success decreases for young firms, we find that a higher fraction of young firms attempt to develop their projects rather than to be acquired. This contrasts the previous literature's findings on acquisitions. The explanation for this result is that an increased likelihood of firms' failures causes a shortage of established firms that can then acquire new young firms. Finally, if acquisition costs are moderate we find that established firms acquire other established firms, but not young firms.

Keywords: Mergers as Reallocation, Firm's Life-cycle

JEL Classification: G34, D83, D92

Suggested Citation

Frantzeskakis, Kyriakos and Ueda, Masako, A Dynamic Equilibrium Model of Firm's Life Cycle and Mergers as Efficient Reallocation (December 2006). Available at SSRN: https://ssrn.com/abstract=953112 or http://dx.doi.org/10.2139/ssrn.953112

Kyriakos Frantzeskakis

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Masako Ueda (Contact Author)

University of Wisconsin, Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-262-3656 (Phone)
608-265-4195 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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