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Merger Activity in Industry Equilibrium

Author

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  • Theodosios DIMOPOULOS

    (University of Lausanne and Swiss Finance Institute)

  • Stefano SACCHETTO

    (Tepper School of Business, Carnegie Mellon University)

Abstract

We study a dynamic industry-equilibrium model that features mergers, entry, and exit by heterogeneous firms. We show how different sources of synergies affect merger cyclicality. Improvements in marginal productivity between merging firms generate a procyclical motive for mergers, while reductions in fixed costs of production generate a countercyclical one. The presence of a merger market makes poorly performing firms less likely to exit the industry in recessions, and it increases the mean and variance of the cross-sectional distribution of firm-level productivities. Consistent with the empirical evidence, we show that announcement returns for large acquirers are lower than for small acquirers, despite large acquirers' higher Tobin's Q.

Suggested Citation

  • Theodosios DIMOPOULOS & Stefano SACCHETTO, 2014. "Merger Activity in Industry Equilibrium," Swiss Finance Institute Research Paper Series 14-56, Swiss Finance Institute, revised Jul 2015.
    • Handle: RePEc:chf:rpseri:rp1456
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    File URL: http://ssrn.com/abstract=2492148
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    More about this item

    Keywords

    Mergers; Industry Equilibrium;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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