Merger Activity in Industry Equilibrium

Theodosios Dimopoulos and Stefano Sacchetto
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Theodosios Dimopoulos: University of Lausanne and Swiss Finance Institute
Stefano Sacchetto: Tepper School of Business, Carnegie Mellon University

No 14-56, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Mergers; Industry Equilibrium (search for similar items in EconPapers)
JEL-codes: D21 D92 E22 E32 G34 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2014-09, Revised 2015-07
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1456

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