Monday, October 24, 2016
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.