Deregulation, Competition and Merger Activity in the U.S. Telecommunications Industry

Abstract:     
I study the patterns of entry and exit activity in the U.S. telecommunications industry and show that the 1996 deregulation increased merger activity by increasing competition. Deregulation opened both the local and long-distance telecom markets to competition from new communication technologies, resulting in a significant increase in IPO activity. The data supports the hypothesis that the increase in merger activity following the 1996 deregulation was an efficiency-driven restructuring response to increased entry, cash flow volatility and inter-firm dispersion in the quality of production technology. The competitive mechanism played a role in how managers in the telecommunications industry reallocated resources via mergers in response to deregulation and technological change. I find insignificant changes to stock valuations after deregulation, but exit of incumbents via merger and bankruptcy increased significantly; smaller and less efficient incumbents exit via bankruptcy. Incumbents who become acquirers in the post-deregulation era are larger, more efficient and less leveraged than their counterparts who become the targets.

Number of Pages in PDF File: 55

Keywords: Mergers, Deregulation, Technological Change, Competition, Restructuring, Efficiency, Misvaluation

JEL Classification: G34, G38

working papers series