Monday, May 17, 2021
This paper examines how firms adjust cash holdings following horizontal mergers in the industry. Using a sample of 16,597 horizontal mergers between US firms from 1984 to 2016, we find that in the three-year period following horizontal mergers, the marginal value of cash decreases for the rivals with lower investment opportunities. Rivals with low Tobin’s Q reduce cash while the rivals with high Tobin’s Q hold more cash. These results suggest that rival firms adjust cash holdings in a way that is more consistent with their investment opportunities. Using a control group of firms exposed to withdrawn horizontal mergers, we argue that the relations between horizontal mergers and the cash adjustments are likely to be causal. Overall, these results imply that horizontal mergers are likely to increase the non-merging rivals’ competitive pressure.