A Theory of Strategic Mergers

Review of Finance, Vol. 16, pp. 517-575, 2011

54 Pages Posted: 7 Mar 2008 Last revised: 12 Nov 2013

See all articles by Gennaro (帅纳) Bernile

Gennaro (帅纳) Bernile

University of Miami - Department of Finance

Evgeny Lyandres

Boston University

Alexei Zhdanov

Pennsylvania State University

Date Written: 2011


We examine firms' strategic incentives to engage in horizontal mergers. In a real options framework, we show that strategic considerations may explain abnormally high takeover activity during periods of positive and negative demand shocks. Importantly, this pattern emerges solely as a result of firms' strategic interaction in output markets and holds in the absence of technological and financial reasons for merging. Varying the intensity of product market competition and the industry structure, and allowing for the existence of operating synergies, operating leverage, and merger-related costs generates additional empirical implications. We test the main predictions of the model using parametric and semi-parametric regression analysis. Consistent with the theory, there is a U-shaped relation between the state of demand and the propensity of firms to merge horizontally, controlling for firms' non-strategic incentives to merge. Furthermore, as predicted by the model, this relation is driven by horizontal mergers within relatively concentrated industries, whereas no such relation exists in industries in which strategic considerations are likely to be less important.

Keywords: horizontal mergers, competition, strategic interaction, real options

JEL Classification: G34

Suggested Citation

Bernile, Gennaro (帅纳) and Lyandres, Evgeny and Zhdanov, Alexei, A Theory of Strategic Mergers (2011). Review of Finance, Vol. 16, pp. 517-575, 2011, Available at SSRN: https://ssrn.com/abstract=891311 or http://dx.doi.org/10.2139/ssrn.891311

Gennaro (帅纳) Bernile

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

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