Why Mergers Reduce Profits, and Raise Share Prices: A Theory of Preemptive Mergers

43 Pages Posted: 11 Sep 2000

See all articles by Sven-Olof Fridolfsson

Sven-Olof Fridolfsson

Research Institute of Industrial Economics (IFN)

Johan Stennek

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Date Written: January 2000

Abstract

We explain the empirical puzzle why mergers reduce profits, and raise share prices. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce their share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.

JEL Classification: L13, L41, G34, C78

Suggested Citation

Fridolfsson, Sven-Olof and Stennek, Johan, Why Mergers Reduce Profits, and Raise Share Prices: A Theory of Preemptive Mergers (January 2000). Available at SSRN: https://ssrn.com/abstract=238948 or http://dx.doi.org/10.2139/ssrn.238948

Sven-Olof Fridolfsson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Johan Stennek (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden
+46 8 665 4536 (Phone)
+46 8 665 4599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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