Mergers and Asset Prices in a Firm Network Economy

24 Pages Posted: 22 Mar 2007

See all articles by Gorazd Brumen

Gorazd Brumen

University of Zurich - Swiss Banking Institute (ISB); Princeton University - Bendheim Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2007

Abstract

We examine merger activity and its effect on asset pricing in a firm network economy. Mergers create internal capital markets which change the cash flow risk structure of the merging firms. We propose a solution concept for coalitional games without the superadditivity axiom, which extends the Shapley value, and apply it to the merging activity of firms in a network. The results show that firm values in a network should not be considered in isolation. Merger corrections increase the equity value of the firms. Higher network dependence decreases the number of coalitions formed, i.e. it encourages mergers, and gives higher value to a merging firm. Recession (prosperity), as measured by the average debt/total assets ratio, generally increase (decrease) the number of coalitions in a network.

Keywords: Mergers, coalitional games without the superadditivity axiom, asset pricing in coalitions, network dependence models, buyer-supplier networks

JEL Classification: G34, C71, C78

Suggested Citation

Brumen, Gorazd, Mergers and Asset Prices in a Firm Network Economy (March 14, 2007). Available at SSRN: https://ssrn.com/abstract=971075 or http://dx.doi.org/10.2139/ssrn.971075

Gorazd Brumen (Contact Author)

University of Zurich - Swiss Banking Institute (ISB) ( email )

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Princeton University - Bendheim Center for Finance ( email )

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