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Abstract:
In this paper, we study the announcement effects of all acquisitions in the recent telecom wave on both the acquirors and their non-merging competitors. We extend the analysis of traditional studies that measure the takeover performance along two dimensions (by studying the returns to acquirors over multiple mergers and by including the non-merging competitors) in order to differentiate between the potential theories for negative returns earned by acquirors. Our results are consistent with the Competitive Advantage Hypothesis that posits that acquisitions are a means of corporate restructuring in a changing environment, awarding the acquiror a competitive edge and thereby making these acquisitions costly for their non-merging competitors (rivals). We find that the rivals of the acquirors experience negative returns, especially around the announcement of non-horizontal acquisitions of -0.38\% on average. Further, we find that closer rivals of the acquirors experience higher negative returns: The competitors that are of similar size as the acquiror earn negative returns of -0.50\% and the ones that provide primarily the same service as the acquiror lose -0.65\% on average. Multivariate test results confirm most of the findings of the univariate tests. In addition, they show that for every -1\% return suffered by the acquiror at the announcement of its acquisition, its rivals suffer -0.04\% on average.

Abstract:
Some acquisitions can be viewed as a means for procuring proprietary technology. For such acquisitions, it may be just as important to block competitors from getting the technology as it is to obtain the technology. If a firm will be adversely affected by a competitor's acquisition, then it can rationally "overpay" for the target to avoid this outcome within a value-maximizing framework. We study the behavior of two bidders that enter a bidding contest for the target where the contest is modelled as a second-price auction with costly losing. In contrast to most of the existing literature, the model supports various outcomes that are consistent with empirical evidence within a rational and value-maximizing framework. The model reconciles two empirical regularities: Mergers increase value through synergies, and acquirors earn zero or negative returns on average. It also is consistent with the recent empirical evidence suggesting that mergers come in response to an economic change, and tend to cluster within industries.

Mergers, Overbidding, Competitive Advantage

Abstract:
This paper examines how industry structure affects corporate investment patterns. Real-options theory shows that deferring irreversible investment in the face of uncertainty is valuable. Theory also shows that the value of waiting to invest falls if investment opportunities are contestable. Consistent with these theories, we find that firms in monopolistic industries exhibit lower investment-q sensitivity and are slower to invest than firms in competitive industries. However, we find that investment-q sensitivity and investment speed are highest in oligopolistic industries, suggesting that the value of investing strategically can outweigh the value of waiting. Indeed, oligopolistic industries experience less entry and more exit than other industries.

corporate investment, industry structure, competition, real options

Abstract:
We show that investment patterns often associated with agency and information problems can emerge as rational responses to product-market rivalry. We establish this result using simultaneous and sequential models of innovative investment that balance two negative externalities. One externality arises when all competing firms invest, thus eroding the gains to innovation accruing to any one firm. Another externality arises when some firms do not invest and lose out to rivals who do innovate. The value of innovative investment therefore depends on the innovation's intrinsic value to each firm and the actions of all competitors. Our analysis can rationalize investment patterns that might appear suboptimal when these externalities are ignored. For instance, our simultaneous model can justify investment levels that might otherwise be interpreted as under or over-investment. Our sequential model shows that value-maximizing firms might optimally herd in their investment decisions. We present evidence supporting key aspects of both the simultaneous and sequential models.

Investment, Externalities, Innovation, Competition