Why mergers reduce profits, and raise share prices: A theory of preemptive mergers

Sven-Olof Fridolfsson and Johan Stennek ()

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: We provide a possible explanation for the empirical puzzle that mergers often reduce profits, but raise share prices. If being an "in- sider" is better than being an "outsider", firms may merge to preempt their partner merging with a rival. The insiders' stock market value is increased, since the risk of becoming an outsider is eliminated. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared.

Keywords: Mergers; Acquisitions; Defensive mergers; Coalition formation; Antitrust (search for similar items in EconPapers)
JEL-codes: C78 G34 L13 L41 (search for similar items in EconPapers)
Pages: 37 pages
Date: 1999-11
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Citations: View citations in EconPapers (46)

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Related works:
Journal Article: Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers (2005)
Working Paper: Why Mergers Reduce Profits and Raise Share Prices: A Theory of Preemptive Mergers (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:1999018

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