When Is One Plus One More Than Two? Theory and Evidence of Merger Motivations

Chune Young Chung, Seok‐Kyun Hur and Chang Liu

International Review of Finance, 2020, vol. 20, issue 3, 771-779

Abstract: We devise a neoclassical economic model that reveals the underlying motivations for mergers, without resorting to distorted firm decisions or stock market inefficiency. Using empirical analyses to verify the model's predictions, we discover that mergers are more likely in economic booms than in recessions. Furthermore, we assert that a firm with insufficient physical capital is likely a bidder in a merger, whereas a firm with large physical capital is likely a target. Our findings are largely consistent with the waves of mergers during economic booms and the theory on operational synergies.

Date: 2020
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