References (21)


Citations (90)


Footnotes (31)



Investigating the Economic Role of Mergers

Gregor Andrade

Harvard Business School - Finance Unit

Erik Stafford

Harvard Business School - Finance Unit

August 1999

What is the economic role of mergers? We investigate this issue by performing a comparative study of mergers and other forms of corporate investment, at the industry and firm levels. In our framework, merger activity is motivated by both firm- and industry-level forces that can generally be described as either "expansionary" or "contractionary." We find strong support, at the industry and the firm level, for the existence of both components of merger activity, consistent with a dual economic role for mergers. We find that industry capacity utilization has significant and opposite effects on merger and non-merger investment, particularly during the 1970s and 1980s. During that period, excess capacity drives industry consolidation through merger, while peak capacity utilization induces industry expansion through non-merger investment. This suggests that one mechanism through which mergers enable industry restructuring is by inducing exit in times of industry-wide excess capacity. This phenomenon is reversed in the 1990s when merger intensity is highest in industries with strong growth prospects, high profitability, and near capacity. Moreover, at the firm-level, we find that both merger and non-merger investment are positively related to the Tobin's q of the acquirer. These two latter findings suggest that there is an important expansionary motivation to mergers as well.

Number of Pages in PDF File: 44

JEL Classification: G31, G34

Open PDF in Browser Download This Paper

Date posted: January 12, 1998  

Suggested Citation

Andrade, Gregor and Stafford, Erik, Investigating the Economic Role of Mergers (August 1999). Available at SSRN: https://ssrn.com/abstract=47264 or http://dx.doi.org/10.2139/ssrn.47264

Contact Information

Gregor M-M. Andrade
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-8018 (Phone)
617-496-8443 (Fax)
Erik Stafford (Contact Author)
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)
Feedback to SSRN

Paper statistics
Abstract Views: 6,395
Downloads: 2,299
Download Rank: 4,077
References:  21
Citations:  90
Footnotes:  31