Propagation in Production Networks: the Spillover of Mergers and Acquisitions

Abstract

This paper proposes an empirical method to identify the firm-level propagation of volatilities sourcing from endogenous events and tracks its paths in production networks. We investigate how mergers and acquisitions (M&As) spill over from the target firms to their peers (i.e., firms that share common suppliers/customers with the targets). After M&As, peers of the target firm experience an average increase in sales by 1.4%. Decomposition of the propagation reveals its trajectory: the common supplier channel carries most of the propagation. While the downstream channel is negligible since it is attenuated by the elasticity of substitution between target firm and its peers.

Keywords: Mergers/Acquisitions, Production Network, Propagation

JEL Classification: E32, G34, L14