Mergers and Asset Prices in a Firm Network Economy

35 Pages Posted: 9 Mar 2008

See all articles by Gorazd Brumen

Gorazd Brumen

University of Zurich - Swiss Banking Institute (ISB); Princeton University - Bendheim Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 4, 2008

Abstract

We examine merger activity and its effect on asset pricing in a firm network economy. Mergers create internal capital markets which change the cash flow risk structure of the merging firms. We propose a solution concept for coalitional games without the superadditivity axiom, which extends the Shapley value, and apply it to the merging activity of firms in a network. The possibility of a merger increases the equity value of standalone firms. Higher network dependence generally increases merger activity but nevertheless causes lower firm equity values. Recession and expansion, as measured by the average debt/total assets ratio, generally decrease the number of coalitions in a network, generating a decreasing curve of merger activity.

Keywords: Mergers, coalitional games without the superadditivity axiom, asset pricing in coalitions, network dependence models, buyer-supplier networks

JEL Classification: G12, G34, C71, C78

Suggested Citation

Brumen, Gorazd, Mergers and Asset Prices in a Firm Network Economy (March 4, 2008). Available at SSRN: https://ssrn.com/abstract=1102690 or http://dx.doi.org/10.2139/ssrn.1102690

Gorazd Brumen (Contact Author)

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Princeton University - Bendheim Center for Finance ( email )

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