Distributive Inefficiency in Horizontal Mergers: Evidence from Wealth Transfers between Merging Firms and Their Customers

51 Pages Posted: 3 Nov 2021

See all articles by Ning Gao

Ning Gao

Manchester Accounting and Finance Group, Alliance Manchester Business School, University of Manchester

Ni Peng

School of Business and Management, Queen Mary University of London

Date Written: August 3, 2021

Abstract

The ultimate goal of antitrust enforcement is to maximize the surplus consumers enjoy by enhancing production efficiency and eliminating market power. Previous literature focuses on the average net wealth effects on merging firms and their stakeholder firms and reports evidence of efficiency gains while no evidence of market power in horizontal mergers. In this paper, we examine how efficiency gains distribute between the merging firms and their customer firms. We find a significant negative relation between the combined abnormal returns on the merging firms and those on their customer firms, demonstrating a wealth transfer effect. Such a negative relation is more pronounced when market power is likely to be more intensive. On average, the merging firms gain, and their customers do not lose. Our results suggest that market power allows merging firms to withhold merger gains that would have been passed to the downstream under perfect competition and prevents customers from enjoying the whole consumer surplus. Distributive inefficiency exists in horizontal mergers.

Keywords: consumer surplus; distributive efficiency; market power; mergers and acquisitions; wealth transfer

JEL Classification: G34, G38, K21, L4

Suggested Citation

Gao, Ning and Peng, Ni, Distributive Inefficiency in Horizontal Mergers: Evidence from Wealth Transfers between Merging Firms and Their Customers (August 3, 2021). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3954834

Ning Gao

Manchester Accounting and Finance Group, Alliance Manchester Business School, University of Manchester ( email )

Booth Street East
.
Manchester, M13 9SS
United Kingdom

HOME PAGE: http://www.research.manchester.ac.uk/portal/Ning.Gao.html

Ni Peng (Contact Author)

School of Business and Management, Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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