Merger Waves: Theory and Evidence
SAC Capital Advisors; University of Pennsylvania - Wharton Financial Institutions Center
March 15, 2009
AFA 2007 Chicago Meetings Paper
This paper presents a model that incorporates product market competition into the standard neoclassical framework. The model explains why value-maximizing firms conduct mergers that appear to lower shareholder value. In a Cournot setting, the model demonstrates a prisoners' dilemma for merging firms in a merger wave. Consistent with the model's implications, the paper empirically documents that horizontal mergers are followed by substantially worse performance when they occur during waves. Moreover, further empirical tests show that the empirical relation between performance and merger waves is independent of the method of payment and increasing in the acquirer's managerial ownership. These findings are difficult to reconcile with alternative interpretations from existing theories.
Number of Pages in PDF File: 56
Keywords: mergersworking papers series
Date posted: March 14, 2006 ; Last revised: December 3, 2009
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