Merger Waves: Theory and Evidence
56 Pages Posted: 14 Mar 2006 Last revised: 3 Dec 2009
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: Suggested Citation
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