Mergers and Asset Prices in a Firm Network Economy
35 Pages Posted: 9 Mar 2008
Date Written: March 4, 2008
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: Suggested Citation