Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry

55 Pages Posted: 29 Oct 2010 Last revised: 10 Aug 2011

David A. Becher

Drexel University

J. Harold Mulherin

University of Georgia - Department of Banking and Finance

Ralph A. Walkling

Drexel University - Lebow College of Business

Date Written: October 27, 2010

Abstract

Our work provides refined tests of the existence and source of merger gains in a neglected industry: utilities. While excluded from traditional analyses, utilities offer fertile ground for a detailed analysis of the traditional theories of synergy, collusion, hubris and anticipation. The analysis of utilities provides methodological advantages and is important for public policy reasons. We find that utility mergers create wealth for the combined bidder and target. These positive wealth effects are consistent with both the synergy hypothesis and the collusion hypothesis. To distinguish between the hypotheses, we study the stock price returns to industry rivals across several dimensions specifically related to collusion: deregulation, horizontal mergers, geography, and withdrawn deals. We also examine the impact of mergers on consumer prices. The results are consistent with synergy and inconsistent with collusion. Analysis of industry rivals that subsequently become targets also rejects the collusion hypothesis and is consistent with the anticipation hypothesis.

Keywords: mergers, synergy, collusion, shareholder wealth effects, product prices

JEL Classification: G34, G38, G14

Suggested Citation

Becher, David A. and Mulherin, J. Harold and Walkling, Ralph A., Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry (October 27, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1699012 or http://dx.doi.org/10.2139/ssrn.1699012

David A. Becher (Contact Author)

Drexel University ( email )

3220 Market Street
1127 Gerri C LeBow Hall
Philadelphia, PA 19104
United States
215-895-2274 (Phone)
215-895-2295 (Fax)

J. Harold Mulherin

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-3644 (Phone)

Ralph August Walkling

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

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