Merger Clusters during Economic Booms

Albert Banal-Estanol (), Paul Heidhues (), Rainer Nitsche and Jo Seldeslacht
Authors registered in the RePEc Author Service: Jo Seldeslachts ()

No 06/07, City University Economics Discussion Papers from Department of Economics, City University, London

Abstract: Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target—by setting the takeover price—screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively “bad fit” acquirers, leading to a hike in merger activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term—a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher merger profits during “merger waves” than outside of waves, which is also in line with empirical evidence.

Keywords: Mergers; Merger Waves; Screening (search for similar items in EconPapers)
JEL-codes: D21 D80 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
Date: 2006-09
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Related works:
Working Paper: Merger Clusters during Economic Booms (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:cty:dpaper:0607

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