The Q-Theory of Mergers

Boyan Jovanovic () and Peter Rousseau ()

No 8740, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Q-theory of investment says that a firm's investment rate should rise with its Q. We argue here that this theory also explains why some firms buy other firms. We find that 1. A firm's merger and acquisition (M&A) investment responds to its Q more -- by a factor of 2.6 -- than its direct investment does, probably because M&A investment is a high fixed cost and a low marginal adjustment cost activity, 2. The typical firm wastes some cash on M&As, but not on internal investment, i.e., the 'Free-Cash Flow' story works, but explains a small fraction of mergers only, and 3. The merger waves of 1900 and the 1920's, `80s, and `90s were a response to profitable reallocation opportunities, but the `60s wave was probably caused by something else.

JEL-codes: O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: 2002-01
Note: AP CF EFG PR
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