Does Acquisition Trigger Follow-up Acquisitions? The Role of Relative Financial Constraints

50 Pages Posted: 14 Jan 2021 Last revised: 1 Feb 2021

See all articles by Dongxu Li

Dongxu Li

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: December 25, 2020

Abstract

Relative financial constraints can affect firms’ aggressiveness in industry competition. Following peer firms’ acquisitions, the non-constrained rivals tend to become acquirers while the constrained rivals are more likely to get acquired. Also, firms may become worse off if they do not make follow-up acquisitions. For the preceding acquisitions, the acquirer would earn higher abnormal returns and profit margins if the rivals are more financially constrained, which suggests the acquirers’ greater market power absent the rivals’ financial capability to compete. These results indicate that considering the non-merging rivals’ relative financial constraints can be an alternative way to detect anticompetitive acquisitions.

Keywords: Relative Financial Constraint, Deep Pocket Theory, Acquisitions, Industry Competition

JEL Classification: G34; L40

Suggested Citation

Li, Dongxu, Does Acquisition Trigger Follow-up Acquisitions? The Role of Relative Financial Constraints (December 25, 2020). Available at SSRN: https://ssrn.com/abstract=3755161 or http://dx.doi.org/10.2139/ssrn.3755161

Dongxu Li (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

B-114, Economics Building
Xiamen, Fujian 361005
China

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