44 Pages Posted: 12 Jan 1998
Date Written: 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.
JEL Classification: G31, G34
Suggested Citation: Suggested Citation