Why Mergers Reduce Profits, and Raise Share Prices

Sven-Olof Fridolfsson and Johan Stennek ()

No 511, Working Paper Series from Research Institute of Industrial Economics

Abstract: We demonstrate a "preemptive merger mechanism" which may explain the empirical puzzle why mergers reduce profits, and raise share prices. A merger may confer strong negative externalilties on the firms outside the merger. If being an "insider" is better than being an "outsider", firms may merge to preempt their partner merging with someone else. Furthermore, the pre-merger value of a merging firm is low, since it reflects the risk of becoming an outsider. These results are derived in a model of endogenous mergers which predicts the conditions under which a merger occurs, when it occurs, and how the surplus is divided.

Keywords: Mergers & acquisitions; definsive merger; coalition formation; antitrust policy (search for similar items in EconPapers)
JEL-codes: C78 G34 L13 (search for similar items in EconPapers)
Pages: 41 pages
Date: 1999-03-12, Revised 2001-12-03
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Why Mergers Reduce Profits, and Raise Share-Prices (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0511

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