Why Mergers Reduce Profits, and Raise Share-Prices

Johan Stennek () and Sven-Olof Fridolfsson

No 2357, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We explain the empirical puzzle why mergers reduce profits, and raise share prices. If being an 'insider' is better than being an 'outsider', firms may merge to preempt their partner merging with a rival. The stock-value is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce the competitors' share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.

Keywords: Acquisitions; Coalition; Defensive mergers; Mergers (search for similar items in EconPapers)
JEL-codes: C78 G34 L13 L41 (search for similar items in EconPapers)
Date: 2000-01
References: Add references at CitEc
Citations: View citations in EconPapers (17)

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