The Aggregate Implications of Mergers and Acquisitions

Innovation, Reallocation, and Growth

Joel David

The Review of Economic Studies, 2021, vol. 88, issue 4, 1796-1830

Abstract: This article develops a search and matching model of mergers and acquisitions (M&A) and uses it to evaluate the implications of merger activity for aggregate economic outcomes. The theory is consistent with a rich set of facts on U.S. M&A, including sorting among merging firms, a substantial merger premium and serial acquisition. It provides a sharp link between these facts and the nature of merger gains. At the micro-level, both complementarities between merging firms and productivity improvements of target firms are important in generating gains. At the macro-level, the model suggests a significant beneficial impact of M&A on aggregate outcomes—the contribution to steady state output is 14 and 4 for consumption—which occurs through the reallocation of resources across firms and equilibrium effects on firm selection and new entrepreneurship. Nevertheless, the economy is not efficient, suggesting a scope for policy improvements—a simple flat tax on M&A can raise steady state consumption as much as 2 relative to the laissez-faire equilibrium. In short, the boundaries of the firm can matter for macroeconomic outcomes.

Keywords: Mergers and acquisitions; Search and matching; Reallocation; Aggregate productivity; E22; E23; G34; L11; L53; O47 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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Working Paper: The Aggregate Implications of Mergers and Acquisitions (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:88:y:2021:i:4:p:1796-1830.

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