Working Paper: NBER ID: w11364
Authors: Gary Gorton; Matthias Kahl; Richard Rosen
Abstract: In this paper, we present a model of defensive mergers and merger waves. We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. A technological or regulatory change that makes acquisitions profitable in some future states of the world can induce a preemptive wave of unprofitable, defensive acquisitions. The timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry.
Keywords: mergers; merger waves; defensive acquisitions; managerial incentives
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Managers' preferences for independence (M54) | Defensive mergers (G34) |
| Managerial private benefits are sufficiently high (D22) | Unprofitable defensive acquisitions (G34) |
| Unprofitable defensive acquisitions (G34) | Preempting potentially profitable acquisitions (G34) |
| Size of private benefits and distribution of firm sizes (D39) | Timing of mergers and identity of acquirers and targets (G34) |
| Defensive mergers (G34) | Merger waves (G34) |
| One firm's defensive acquisition (G34) | Others more vulnerable (I14) |