Working Paper: CEPR ID: DP2357
Authors: Svenolof Fridolfsson; Johan Stennek
Abstract: We explain the empirical puzzle why mergers reduce profits, and raise share prices. If being an 'insider' is better than being an 'outsider', firms may merge to preempt their partner merging with a rival. The stock-value is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce the competitors' share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.
Keywords: mergers; acquisitions; defensive mergers; coalition
JEL Codes: C78; G34; L13; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| merger event (G34) | decrease in profit flow (E25) |
| merger event (G34) | increase in stock value (G10) |
| decrease in profit flow (E25) | increase in stock value (G10) |
| increase in consumer prices + increase in competitor profits (F61) | decrease in competitors' share prices (G34) |
| premerger value of outside firms (G34) | decrease in their share prices (G10) |