Industry Links in Merger Waves

Ahern and Harford have a new paper, The Importance of Industry Links in Merger Waves, that uses a network approach to understand merger waves.  It seems to be true that industry links were important component of the first great merger wave (late 19th century) and since the early 1990s.  On the other hand, it's less obviously true of the merger wave of the 1920s (stock market bubble), the 1960s (conglomerate era), and the 1980s (de-conglomerate era).  

Abstract: Prior research finds that economic shocks lead to merger waves within an industry. However, industries do not exist in isolation. In this paper, we argue that both intra- and inter-industry merger waves are driven by customer-supplier relations between industries. To test our theory, we construct an industry network using techniques from the social-networking literature, where inter-industry connections are determined by the strength of supplier and customer relations. First, we find that the strength of industry network ties strongly predicts inter-industry merger activity in the cross-section. Second, we show that merger waves propagate across the industry network over time: high levels of merger activity in an industry lead to subsequently higher levels of activity in connected industries. By using a network approach, we provide new insight into understanding why mergers occur in waves.

-bjmq