The Timing of Mergers along the Production Chain, Capital Structure, and Risk Dynamics

Posted: 7 Jul 2012 Last revised: 7 Aug 2015

See all articles by Monika Tarsalewska

Monika Tarsalewska

University of Exeter Business School

Date Written: April 6, 2012

Abstract

I demonstrate that the timing of vertical mergers is generally dependent on industry characteristics. My predictions are consistent with empirically observed patterns of vertical mergers. I show that merger activity during economic upturns tends to be motivated by operating efficiencies, while merger activity during economic downturns tends to occur as a means of keeping the production chain operational. Mergers allow firms to capture synergies and improve efficiencies in order to survive economic contractions. The pricing framework implies that a vertical merger decision usually reduces risk during two different economic states.

Keywords: Vertical mergers, Real options, Risk

JEL Classification: G13; G12; G34; D23; D24

Suggested Citation

Tarsalewska, Monika, The Timing of Mergers along the Production Chain, Capital Structure, and Risk Dynamics (April 6, 2012). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2101552 or http://dx.doi.org/10.2139/ssrn.2101552

Monika Tarsalewska (Contact Author)

University of Exeter Business School ( email )

XFI building, Streatham Campus
Rennes Drive
Exeter, Devon EX4 4ST
United Kingdom

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