Merger Waves: Theory and Evidence

56 Pages Posted: 14 Mar 2006 Last revised: 3 Dec 2009

See all articles by Jinghua Yan

Jinghua Yan

SAC Capital Advisors; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: March 15, 2009

Abstract

This paper presents a model that incorporates product market competition into the standard neoclassical framework. The model explains why value-maximizing firms conduct mergers that appear to lower shareholder value. In a Cournot setting, the model demonstrates a prisoners' dilemma for merging firms in a merger wave. Consistent with the model's implications, the paper empirically documents that horizontal mergers are followed by substantially worse performance when they occur during waves. Moreover, further empirical tests show that the empirical relation between performance and merger waves is independent of the method of payment and increasing in the acquirer's managerial ownership. These findings are difficult to reconcile with alternative interpretations from existing theories.

Keywords: mergers

Suggested Citation

Yan, Jinghua, Merger Waves: Theory and Evidence (March 15, 2009). AFA 2007 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=890608 or http://dx.doi.org/10.2139/ssrn.890608

Jinghua Yan (Contact Author)

SAC Capital Advisors ( email )

330 Madison Avenue, 35th Floor
New York, NY 10017
United States

University of Pennsylvania - Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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