Synergistic Mergers in an Agency Context: An Illustration of the Interaction of the Observability Problem and Synergistic Merger

Aggregation, Efficiency, and Measurement, Forthcoming

24 Pages Posted: 18 Apr 2007

See all articles by Tim S. Campbell

Tim S. Campbell

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Anthony M. Marino

University of Southern California - Marshall School of Business

Abstract

This paper formulates a simple agency problem in a single division firm and has that firm merge with another firm having the same agency problem. The merger creates synergy, but it also causes the principal to lose information in observing the agent's performance. We call the latter problem the observability problem associated with merger. We focus on the interaction of these two by-products of merger and study their effects on the firm's agency contract and profit. A key point is that many of the beneficial effects that we would associate with the presence of synergy can be undone by the observability problem, so that the synergistic benefits of merger can be misgauged, if the observability problem is ignored. Two empirically testable implications arise. First, if the post merger contract is less sensitive, then the observability problem is essentially nonexistent and the merger is profitable. Second, if the post merger contract is very sensitive, then synergy is swamping the observability problem and the merger is profitable.

Keywords: mergers

Suggested Citation

Campbell, Tim S. and Marino, Anthony M., Synergistic Mergers in an Agency Context: An Illustration of the Interaction of the Observability Problem and Synergistic Merger. Aggregation, Efficiency, and Measurement, Forthcoming, Available at SSRN: https://ssrn.com/abstract=981024

Tim S. Campbell (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Anthony M. Marino

University of Southern California - Marshall School of Business ( email )

Dept. of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6525 (Phone)
213-740-6650 (Fax)

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