Foreign Competition and Acquisitions
50 Pages Posted: 10 Oct 2017 Last revised: 15 Mar 2018
Date Written: March 1, 2018
I provide evidence on the impact of foreign competition on firms’ propensities to engage in mergers and acquisitions. Using import tariff reductions as exogenous shocks that increase foreign competition, I find that affected firms are more likely to make acquisitions following tariff reductions. Cross-sectional tests show that this association is more pronounced for single segment firms, capital intensive firms, and low growth firms, which suggests that this association is stronger for firms that stand to gain more from acquisitions when faced with increased competition. Moreover, the positive relationship between acquisition likelihood and tariff cuts is more pronounced for financially unconstrained firms, and during times of high capital liquidity, which implies that it is easier for firms with greater access to capital to respond to increases in foreign competition by making acquisitions. Finally, I find some evidence that the acquisitions made in response to tariff decreases are associated with positive wealth gains for bidder shareholders, and better firm profitability in the next year, indicating that firms acquire to respond to increased competition by improving their operational efficiency.
Keywords: Mergers, Acquisitions, Foreign Competition, Import Tariffs, Corporate Restructuring, Product Markets
JEL Classification: G34, F10, F13, F14, F65
Suggested Citation: Suggested Citation