Horizontal Mergers, Collusion, and Stockholder Wealth

Abstract

This paper tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders of the bidder and target firms because they increase the probability of successful collusion among rival producers. Under the collusion hypothesis, rivals of the merging firms benefit from the merger since successful collusion limits output and raises product prices and/or lowers factor prices. This proposition is tested on a large sample of horizontal mergers in mining and manufacturing industries, including mergers challenged by the government with violating antitrust laws, and a "control" sample of vertical mergers taking place in the same industries. While we find that the antitrust law enforcement agencies systematically select relatively profitable mergers for prosecution, there is little evidence indicating that the mergers would have had collusive, anticompetitive effects.

Keywords: Merger, collusion, market power, antitrust, efficiency, rivals, industry rents

JEL Classification: G34, G38, L12, L41