Working Paper: CEPR ID: DP6867
Authors: Joseph A. Clougherty; Tomaso Duso
Abstract: It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, ?future acquisition probability? does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type.
Keywords: Acquisitions; Event Study; Mergers; Rivals
JEL Codes: G14; G34; L22; M20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mergers reducing competitive rivalry (L14) | enhancing pricing power for all firms (L11) |
| destructive mergers for insider firms (G34) | benefiting rival firms (D26) |
| types of mergers (market power vs. nonsynergistic) (L19) | different effects on merging and rival firms (L19) |
| horizontal mergers (L22) | positive abnormal returns for rivals (G17) |
| non-merging firms (L19) | gains from mergers (G34) |
| merger waves (F12) | insensitivity of stock reactions of rivals (D43) |