Monday, October 24, 2016

Merger Activity in Industry Equilibrium

Theodosios DIMOPOULOS (University of Lausanne and Swiss Finance Institute) and Stefano SACCHETTO (Tepper School of Business, Carnegie Mellon University) discuss Merger Activity in Industry Equilibrium.

ABSTRACT: We study a dynamic industry-equilibrium model that features mergers, entry, and exit by heterogeneous firms. We show how different sources of synergies affect merger cyclicality. Improvements in marginal productivity between merging firms generate a procyclical motive for mergers, while reductions in fixed costs of production generate a countercyclical one. The presence of a merger market makes poorly performing firms less likely to exit the industry in recessions, and it increases the mean and variance of the cross-sectional distribution of firm-level productivities. Consistent with the empirical evidence, we show that announcement returns for large acquirers are lower than for small acquirers, despite large acquirers' higher Tobin's Q.

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