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Vertical Mergers and the Market Valuation of the Benefits of Vertical Integration

34 Pages Posted: 18 Jan 2009  

Simi Kedia

Rutgers Business School

S. Abraham Ravid

Yeshiva University - Syms School of Business

Vicente Pons

affiliation not provided to SSRN

Date Written: January, 16 2009

Abstract

This paper explores the market reaction to vertical mergers and incorporates into the analysis predictions based on I/O theories.
We develop a classification to separate the various types of mergers, and focus on the determinants and wealth impacts of vertical mergers over the period 1979-2002. Abnormal returns for vertical merger announcements are positive until 1996, and turn negative afterwards. Acquirers suffer most of the losses. We present and test several hypotheses based upon some well known I/O theories of vertical integration. We find support for the most fundamental insight in the I/O literature, namely, that vertical mergers generate most value when undertaken in imperfectly competitive markets and when firms have to invest in specialized assets making market exchanges difficult. There is little evidence to support the view that information based contracting problems or price uncertainty, at least as captured in this paper, generate a value maximizing rationale for vertical integration. However, we show that informational asymmetries can increase the value of horizontal mergers.

Keywords: mergers, vertical integration

JEL Classification: G34, L1

Suggested Citation

Kedia, Simi and Ravid, S. Abraham and Pons, Vicente, Vertical Mergers and the Market Valuation of the Benefits of Vertical Integration (January, 16 2009). Available at SSRN: https://ssrn.com/abstract=1329088 or http://dx.doi.org/10.2139/ssrn.1329088

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

S. Abraham Ravid (Contact Author)

Yeshiva University - Syms School of Business ( email )

United States

Vicente Pons

affiliation not provided to SSRN ( email )

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