The Timing of Mergers along the Production Chain, Capital Structure, and Risk Dynamics
Posted: 7 Jul 2012 Last revised: 7 Aug 2015
Date Written: April 6, 2012
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: Suggested Citation