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Industry Shock Expectations, Interindustry Linkages, and Merger Waves: Evidence from the Hospital Industry

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  • Minjung Park
  • Robert Town

Abstract

It is well known that mergers often occur in waves, and this paper develops a new mechanism for merger waves: expectations over industry shocks. We develop a simple test of this explanation and use it to explore the role of expectations in the context of the 1990s hospital merger wave. Managed care such as Health Maintenance Organizations (HMOs) started to become popular in the late 1980s and ultimately became an important player in the health insurance market. Our empirical analysis shows that the expected increase in the popularity of HMOs was partly responsible for the hospital merger wave of the 1990s: hospitals feared that the “innovation” of managed care in the downstream insurance market would penetrate the upstream hospital market and responded to this belief by merging. Our results show the importance of incorporating expectations and interindustry linkages into the understanding of merger waves.

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  • Minjung Park & Robert Town, 2014. "Industry Shock Expectations, Interindustry Linkages, and Merger Waves: Evidence from the Hospital Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(3), pages 548-567, September.
  • Handle: RePEc:bla:jemstr:v:23:y:2014:i:3:p:548-567
    DOI: 10.1111/jems.12067
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    Cited by:

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    3. Robert Clark & Mario Samano, 2022. "Incentivized Mergers and Cost Efficiency: Evidence from the Electricity Distribution Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 70(4), pages 791-837, December.

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