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The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia

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  • Dennis C. Mueller

    (Department of Economics, University of Vienna, BWZ-Bruenner Strasse 72, A-1210 Vienna, Austria)

  • Mark L. Sirower

    (Boston Consulting Group, 135 E. 57th St., New York, NY 10022, USA, and New York University)

Abstract

Despite the large number of event studies of mergers that have been undertaken, considerable disagreement still exists over whether mergers increase the value of the merging firms, and if so why. Most event studies measure the average returns to the acquired and acquiring companies' shareholders separately, and based on these averages conclude either that mergers increase wealth, or that they reduce it. From this the authors go on to claim support either for a hypothesis about how mergers increase efficiency, or for one that claims they do not. This paper develops a methodology that uses the distribution of gains and losses across the two samples of firms, and their relationship to one another to test four hypotheses about why mergers occur: (1) the market-for-corporate-control hypothesis, (2) the synergy hypothesis, (3) the managerial discretion hypothesis, and (4) the hubris hypothesis. The hypotheses are tested with data for 168 mergers between large companies from 1978 through 1990. Considerable support is found for the managerial discretion and hubris hypotheses, and some support is found for the market-for-corporate-control hypothesis. Little or no support is found for the hypothesis that mergers create synergies and that shareholders of both the acquiring and acquired firms share gains from these synergies. Copyright © 2003 John Wiley & Sons, Ltd.

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  • Dennis C. Mueller & Mark L. Sirower, 2003. "The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(5), pages 373-391.
    • Handle: RePEc:wly:mgtdec:v:24:y:2003:i:5:p:373-391
    DOI: 10.1002/mde.1103
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    2. Maria L. Goranova & Richard L. Priem & Hermann A. Ndofor & Cheryl A. Trahms, 2017. "Is there a “Dark Side” to Monitoring? Board and Shareholder Monitoring Effects on M&A Performance Extremeness," Strategic Management Journal, Wiley Blackwell, vol. 38(11), pages 2285-2297, November.
    3. Dennis C. Mueller & B. Burcin Yurtoglu, 2007. "Corporate governance and the returns to acquiring firms' shareholders: an international comparison," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 879-896.
    4. Ivaldi, Marc & Motis, Jrissy, 2007. "Mergers as Auctions," CEPR Discussion Papers 6434, C.E.P.R. Discussion Papers.
    5. Gudmundsson, Sveinn Vidar & Merkert, Rico & Redondi, Renato, 2020. "Cost structure effects of horizontal airline mergers and acquisitions," Transport Policy, Elsevier, vol. 99(C), pages 136-144.
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    7. Chi, Jing & Sun, Qian & Young, Martin, 2011. "Performance and characteristics of acquiring firms in the Chinese stock markets," Emerging Markets Review, Elsevier, vol. 12(2), pages 152-170, June.
    8. Acero, Isabel & Alcalde, Nuria, 2021. "Institutional context as a moderator of the relationship between board structure and acquirer returns," Research in International Business and Finance, Elsevier, vol. 57(C).
    9. Barbopoulos, Leonidas G. & Adra, Samer, 2016. "The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 283-294.
    10. Madhusmita Bhadra & Doyeon Kim, 2023. "Income elasticity of demand and stock market beta," International Finance, Wiley Blackwell, vol. 26(2), pages 225-240, August.
    11. Jrisy Motis, 2007. "Mergers and Acquisitions Motives," Working Papers 0730, University of Crete, Department of Economics.
    12. Díaz Díaz, Belén & Sanfilippo Azofra, Sergio & López Gutiérrez, Carlos, 2013. "Synergies or overpayment in European corporate M&A," MPRA Paper 51070, University Library of Munich, Germany.
    13. Randall Morck & Bernard Yeung, 2010. "Agency Problems and the Fate of Capitalism," NBER Working Papers 16490, National Bureau of Economic Research, Inc.
    14. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin, 2008. "Insider ownership, ownership concentration and investment performance: An international comparison," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 688-705, December.
    15. Lucrezia Fattobene & Marco Caiffa, 2016. "Sitting on the Board or Sitting on the Throne? Evidence of Boards' Overconfidence from the Italian Market," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(2), pages 235-269, July.
    16. Agha, Mahmoud & Hossain, Md Mosharraf, 2022. "Are board monitoring and CEO incentives substitutes for each other? Evidence from Australian market reaction to acquisition announcements," International Review of Financial Analysis, Elsevier, vol. 81(C).
    17. Tang, Haodan & Fang, Senhui & Jiang, Dianchun, 2022. "The market value effect of digital mergers and acquisitions: Evidence from China," Economic Modelling, Elsevier, vol. 116(C).
    18. Peter C. Carstensen, 2018. "Merger Guidelines and the Limits of Our Understanding," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(3), pages 477-506, November.
    19. Klaus Gugler & Dennis C. Mueller & B. Burçin Yurtoglu, 2006. "The Determinants of Merger Waves," CIG Working Papers SP II 2006-01, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    20. Yuan, Chen & Jiang, Hanming & Chen, Chen, 2023. "Differences in returns to cross-border and domestic mergers and acquisitions: Empirical evidence from China using PSM-DID," Finance Research Letters, Elsevier, vol. 55(PB).
    21. Daryl Koehn & Maria Goranova, 2018. "Do Investors See Value in Ethically Sound CEO Apologies? Investigating Stock Market Reaction to CEO Apologies," Journal of Business Ethics, Springer, vol. 152(2), pages 311-322, October.
    22. Thraya, Mohamed Firas & Hamza, Taher, 2019. "Bidder excess control, target overpayment and control contestability: Evidence from France," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 178-190.

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