Industry Shock Expectations, Interindustry Linkages, and Merger Waves: Evidence from the Hospital Industry

20 Pages Posted: 26 Jul 2014

See all articles by Minjung Park

Minjung Park

Ewha Womans University

Robert J. Town

National Bureau of Economic Research (NBER)

Date Written: Fall 2014

Abstract

It is well known that mergers often occur in waves, and this paper develops a new mechanism for merger waves: expectations over industry shocks. We develop a simple test of this explanation and use it to explore the role of expectations in the context of the 1990s hospital merger wave. Managed care such as Health Maintenance Organizations (HMOs) started to become popular in the late 1980s and ultimately became an important player in the health insurance market. Our empirical analysis shows that the expected increase in the popularity of HMOs was partly responsible for the hospital merger wave of the 1990s: hospitals feared that the “innovation” of managed care in the downstream insurance market would penetrate the upstream hospital market and responded to this belief by merging. Our results show the importance of incorporating expectations and interindustry linkages into the understanding of merger waves.

Suggested Citation

Park, Minjung and Town, Robert J., Industry Shock Expectations, Interindustry Linkages, and Merger Waves: Evidence from the Hospital Industry (Fall 2014). Journal of Economics & Management Strategy, Vol. 23, Issue 3, pp. 548-567, 2014, Available at SSRN: https://ssrn.com/abstract=2472238 or http://dx.doi.org/10.1111/jems.12067

Minjung Park (Contact Author)

Ewha Womans University ( email )

11-1 Daehyun-dong
Seodaemun-gu
Seoul 120-750, Seoul Seoul 120
Korea, Republic of (South Korea)

Robert J. Town

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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