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Horizontal Mergers, Collusion, and Stockholder Wealth
Abstract
This paper tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders of the bidder and target firms because they increase the probability of successful collusion among rival producers. Under the collusion hypothesis, rivals of the merging firms benefit from the merger since successful collusion limits output and raises product prices and/or lower factor prices. This proposition is tested on a large sample of horizontal mergers in mining and manufacturing industries, including mergers challenged by the government with violating antitrust laws, and a ‘control’ sample of vertical mergers taking place in the same industries. While we find that the antitrust law enforcement agencies systematically select relatively profitable mergers for prosecution, there is little evidence indicating that the mergers would have had collusive, anticompetitive effects.
... Whereas foreign takeovers are important events for the firms involved, they also have significant effects on peer firms by reshaping industry structures and boundaries and by rebalancing the relative bargaining power within industries. 2 The objective of this article is to provide novel insights into the competitive effects of foreign acquisitions on industry peers in the United States. To do so, I follow a long tradition in the literature that begins with Eckbo (1983) and Stillman (1983), and I rely on changes in peers' stock prices to measure the adjustments in industries' competitive forces that stock market investors anticipate when foreign deals are announced. 3 The literature has proposed three theories to describe the stock price response of industry peers around takeovers. ...
... If observing a takeover increases the probability of observing another takeover in the same industry in the short term, this should affect peers' stock prices. The "collusion" theory posits that the disappearance of a rival reinforces the bargaining power of the remaining competitors vis-à-vis suppliers and clients, which should facilitate collusion among them (e.g., Eckbo (1983)). Finally, the "competition" theory posits that takeovers improve the efficiency of target companies, which could result in more intense industry competition (e.g., Eckbo (1983)). ...
... The "collusion" theory posits that the disappearance of a rival reinforces the bargaining power of the remaining competitors vis-à-vis suppliers and clients, which should facilitate collusion among them (e.g., Eckbo (1983)). Finally, the "competition" theory posits that takeovers improve the efficiency of target companies, which could result in more intense industry competition (e.g., Eckbo (1983)). The collusion and anticipation theories predict positive peers' stock price reactions around takeover announcements, while the competition theory's predictions are negative. ...
This article studies how industry peers’ stock prices respond when another firm in the industry is acquired by a foreign firm. The average stock price reactions of industry peers in horizontal foreign acquisitions around deal announcements are significantly negative. Peers’ returns are more negative in growing, less specialized, and competitive industries. Moreover, the negative stock price reactions of industry peers are related to future decreases in their operating performance. Overall, these results suggest that foreign acquisitions have strong competitive effects for the industry peers of U.S. target companies.
... For instance, a merger by it's very nature decreases the number of firms in an industry, which consequently increases the concentration of firms in the industry. Neoclassical industrial organization theory suggests that if firms operate in an imperfectly competitive market, one less firm might increase the pricing power of the remaining firms (Bresnahan 1989;Eckbo 1983;Stigler 1964). In this scenario, we would also expect a positive, and symmetric, price reaction from peer firm stakeholders; especially if collusion, explicit or otherwise, decreased the default risk of the remaining firms. ...
... Prior research has established that being acquired is, on average, a value increasing proposition for the stakeholders of a firm (Asquith and Kim 1982;Bradley et al. 1988;Eckbo 1983). However, in practice, it is certainly the case that every firm faces a different opportunity set, and thus stakeholders of a firm may not find it universally beneficial for their firm to become a target. ...
... The acquisition probability hypothesis implies that following the "average merger" the stakeholders of the merged firms' peers should experience an increase in wealth (Eckbo 1983). In particular, for those peer firms that have the highest probability of being acquired, their stakeholders should experience a greater increase in wealth. ...
We study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. We argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction. Consistent with these hypotheses, we show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, we document that, cross-sectionally, the abnormal returns we observe from peer bondholders are concentrated among firms that have the highest expected risk reduction benefit from a potential acquisition. In order to distinguish a potential reduction in risk as the explicit return driver, we show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected risk reduction benefit.
... O trabalho faz uma análise da fusão entre o Bradesco e o HSBC através da metodologia de Estudo de Eventos. De acordo com Eckbo (1983), uma fusão anticompetitiva beneficia não apenas as firmas participantes da fusão, mas também as firmas rivais, pois um ambiente menos competitivo as favorece. Então, uma fusão será anticompetitiva se houver um aumento no valor das ações das rivais. ...
... O método traz grande contribuição prática para o aperfeiçoamento da análise de ACs, pois reúne as qualidades de possuir uma sólida fundamentação teórica e demandar tão somente dados públicos, facilmente disponíveis: os valores das ações. Eckbo (1983, apud De Souza et al. 2015 foi o primeiro a utilizar a técnica de estudo de eventos para a análise de fusões horizontais com o objetivo de detectar efeitos unilaterais, tanto na forma de geração de eficiências quanto de elevação do poder de mercado. Suas ideias se baseiam em duas teorias que serão apresentadas nos próximos tópicos: a teoria da concorrência imperfeita em oligopólios (seção 2) e a teoria do mercado de capitais eficiente (seção 3). ...
... Para a aplicação do estudo de eventos, Eckbo (1983, apud De Souza et al, 2015 baseou-se na hipótese de eficiência do mercado de ações (EMH), que considera que o valor das ações reflete o valor presente do fluxo de caixa das empresas; na hipótese de expectativas racionais (REH) dos agentes; e na hipótese de que algumas fusões anticompetitivas não são boas apenas para as firmas de dentro das fusões, mas também para as suas rivais. Sem as hipóteses de eficiência e expectativas racionais, a metodologia não seria válida, pois não seria possível estabelecer um padrão para as reações aos eventos analisados. ...
This paper analyzes the merger between Bradesco and HSBC through the event studies. Eckbo (1983) argues that anti-competitive mergers benefit not only merging firms, but also their rivals, since a less competitive environment also favors them. Therefore, a merger will be anti-competitive if there is an increase in the rival firms’ stock prices. On the other hand, if the market expects that a given merger will produce significant efficiency gains, a decrease in the rival firms’ stock prices would be observed. The analysis by event study was based on daily quotations and market value from the rivals firms. The results indicate a positive impact of the merger on the value of the rivals, so the merger can be considered as anticompetitive. Therefore, the CADE’s decision to approve the merger was inconsistent with the results obtained by the methodology.Key words: Merger evaluation, Event Studies, Competitive effects.
... Similar results were obtained for the remaining three merger waves. For example, Eckbo (1983) reports significant positive CAARs for target firms around merger proposal dates based on a sample of horizontal mergers in the mining and manufacturing industries during the 1960s and 1970s. Bradley et al. (1988) investigate tender offers during the third merger wave, showing that successful deals enhance the net shareholder values of newly combined firms by an average of 7.4%. ...
... Bradley et al. (1988) investigate tender offers during the third merger wave, showing that successful deals enhance the net shareholder values of newly combined firms by an average of 7.4%. In the same period, the bidding firms' shareholders did not benefit as much from deal completion, with average abnormal announcement returns anchoring near zero (Asquith 1983;Eckbo 1983). This large gap between the returns to the target and bidder firms' shareholders widens in the subsequent merger waves. ...
Over the past few decades, the rapid growth of mergers and acquisitions (M&As) has received interest from academics and practitioners. While M&As continue to be the subject of thorough investigation from a corporate governance standpoint, comparatively less effort has been made to organize and link empirical findings with neoclassical economic theories. Herein, we explore monumental studies from several strands of M&A literature, emphasizing the motives and outcomes of horizontal M&As in the US market.
... During bank merger announcements, Eckbo (1983), Cybo-Ottone and Murgia (2000), and Beitel and Schiereck (2004) found that the share value increases as a result of more consolidated markets which enhances the profits of bigger firms. However, it is crucial to highlight that the result contradict some other studies undertaken, particularly in the US, such as Cornett et al. (2011) and Siems (1996), which found that banks' share prices declined after M&As and this may affect dividend payout decisions International Journal of Management, Economics and Social Sciences adversely. ...
Within the sphere of financial management for Nigerian Deposit Money Banks (DMBs), the dividend payout ratio stands as a crucial indicator, influenced by a myriad of factors. This study scrutinized the impact of banks' specific factors, macroeconomic influences, and mergers and acquisitions on the dividend payout ratio of five selected DMBs. Secondary data collected from annual report of the selected banks over the 1987-2022 period were utilized. Correlation analysis, panel least square regression, and diagnostic tests like Hausman test were employed for data analysis. Results showed that profitability, liquidity, and bank size were positively associated with dividend payout ratio except leverage, which negatively affected dividend payout ratio. Moreover, gross domestic product and exchange rate had favorable and substantial effect on dividend payout ratio. Contrastingly, inflation and interest rates had significant but adverse effect on dividend payout ratio. Furthermore, findings on post-mergers and acquisition showed that banks capitalization, current ratio, and market shares demonstrated positive and significant effect on dividend payout ratio; whereas, debt ratio exhibited negative effect. In conclusion, the study advocated for strategic measures among Nigerian banks, emphasizing the enhancement of profitability, maintenance of liquidity, and effective management of leverage to bolster their dividend payout policies.
... During bank merger announcements, Eckbo (1983), Cybo-Ottone and Murgia (2000), and Beitel and Schiereck (2004) found that the share value increases as a result of more consolidated markets which enhances the profits of bigger firms. However, it is crucial to highlight that the result contradict some other studies undertaken, particularly in the US, such as Cornett et al. (2011) and Siems (1996), which found that banks' share prices declined after M&As and this may affect dividend payout decisions International Journal of Management, Economics and Social Sciences adversely. ...
... Prior studies show that M&As can result in changes in industry structure and competition that affect industry peer firms. On average, M&A announcements are associated with positive stock price reactions for industry peer firms, which have been attributed to peer firms benefiting from (1) a decrease in competition, (2) an improvement in industry efficiency, or (3) an increase in the probability that the peer firms themselves become targets (Eckbo 1983;Fee and Thomas 2004;Shahrur 2005;Song and Walkling 2000). Using data on the quality and prices of goods sold by firms, Sheen (2014) provides more direct evidence that M&As result in competitive spillover effects for industry peer firms. ...
This study documents that M&A delistings are associated with a deterioration in the quality of analysts’ information environment for industry peer firms, measured by an increase in analysts’ absolute forecast errors and dispersion. This effect persists for six quarters and is larger when the delisting target firm contributes relatively more to the industry information environment. Further, we find that, among analysts forecasting earnings for an industry peer firm, those who also followed the delisted target firm in the pre-M&A period experience a larger increase in their absolute forecast errors. A comparison based on public versus private target firms also suggests that the loss of target firms’ public disclosures plays a role in the deterioration in the quality of analysts’ information environment. In additional analyses, we find evidence consistent with this effect resulting from a deterioration in analysts’ ability to exploit across-firm information complementarities.
JEL Classifications: G14; G18; G34; M40.
... Third, existing studies find that prior to bidding in the P&As, winning bidders tend to be better performing than their rivals (e.g., Granja et al. 2017). Consequently, winning these auctions may further improve their competitive positions because, for instance, after the acquisitions they are able to implement a more cost-efficient production strategy (Steiner 1975;Eckbo 1983). Under this hypothesis, while these competitive effects benefit the acquirers, we anticipate that losing bidders will exhibit negative cumulative abnormal returns as their future performance as well as competitive position will worsen. ...
Between 2007 and 2013, the Federal Deposit Insurance Corporation (FDIC) used purchase and assumption (P&A) as a resolution method to auction 492 failed institutions to healthy banks. While existing studies reveal positive value effects on winning bidders of these auctions, this study finds that losing bidders experience negative abnormal stock returns. Furthermore, the losing bidders’ stockholders react negatively to a worsening market condition and an increased probability of failure. The returns, nevertheless, are related to the market power gains and distorted competitive condition post-auction. These results raise concerns that this type of intervention potentially gives rise to anticompetitive behavior among participating banks of FDIC auctions.
... By contrast, CARs are +6.2% for target firms in the event window and +13.3% for the 20 day period before "day −1". Eckbo (1983) performs a similar study for the period 1963-1978 but uses a 3 day event window (days are −1, 0, and +1). The author finds that stockholders of bidders suffer negative CARs of 0.07% compared to the positive ones (+1.58%) they enjoy during the 20 day period before the event. ...
This study aims to investigate the effect of mergers and acquisitions (M&A) on shareholders’ wealth. Additionally, this study investigates the impact of the economic crisis during 2007–2008 on the shareholders’ perceptions of gaining additional value from mergers and acquisitions. In this paper, a sample of 84 M&As from 2006 to 2015 in Greece are studied to investigate the effect on shareholders of bidder companies. We find significantly negative abnormal returns just before the announcement of M&A, which negatively affects the bidder firms’ value. It is also observed that after 2009 M&A cases decreased, maybe because of the crisis in Greece that changed the investors’ perception of a value-destroying event. Companies that engage in M&A activities during economic downturns tend to experience a decline in shareholder value. This could be due to various factors, such as increased uncertainty and risk associated with such activities during economic uncertainty. By understanding the potential impact of such activities on shareholder value, companies can make more informed decisions about whether and when to pursue M&A opportunities.
... Gilbert and Newbery (1982) demonstrated that a relative monopoly after horizontal merges and acquisition encourages the acquirer to innovate continuously [48]. Due to the speciality of the industry chain in the agricultural industry, we believe that compared with horizontal merges and acquisition, the highly recognized model with abundant research at home [49][50][51][52][53][54], vertical merges and acquisition makes it possible for the chain integrity, systematic innovation and internal coordination of agricultural enterprises. And increasing R&D Input can further improve the overall efficiency of the innovation system. ...
With the development of global economic integration, merges and acquisition has (M&A) increasingly become the main way to enhance the competitiveness of enterprises. Technological innovation plays an important role as an influential factor in the success of merges and acquisition. This research takes 120 merges and acquisition Enterprises of Chinese listed agricultural enterprises from 2009 to 2019 as the research sample, constructs the comprehensive performance evaluation model based on the factor analysis. And on the basis of the baseline regression model, R&D Input is introduced as an intermediate variable, PSM is used to control the endogenous problem. Through a series of robustness checks, we conclude that, different merges and acquisition types have various effects on the performance of listed agricultural enterprises. Horizontal M&A and vertical M&A have significantly positive effects on enterprise performance, while mixed M&A is negative. R&D Input plays a mediating role between merges and acquisition type and its impact on enterprise performance. Vertical M&A is clearer than horizontal M&A. At the same time, less R&D Input after mixed M&A gives rise to worse performance of agricultural enterprises.
... (Last accessed November 10, 2022.) 3 The uncertain nature of drug development makes the announcement dates difficult to know in advance. 4 Event study approach is widely used across different fields in economics, see, e.g., Eckbo (1983); Whinston and Collins (1992); Card and Krueger (1995); Fisman (2001); Dube et al. (2011); Kogan et al. (2017); Boller and Scott Morton (2020); Langer and Lemoine (2020); Jacobo-Rubio et al. (2020), and Känzig (2021). announcement date to get the cumulative abnormal return (CAR). ...
We measure the $\textit{value of pharmaceutical drug innovations}$ by estimating the market values of drugs and their development costs. We rely on market responses to firms' drug development announcements to identify the values and costs. Using announcements by public U.S. pharmaceutical firms and their daily stock returns, we estimate the average market value of a successful drug at \$1.62 billion. At the discovery stage, drugs are valued at \$64.3 million, whereas their expected development cost is \$58.5 million, on average. Furthermore, we estimate the costs of the three phases of clinical trials at \$0.6, \$30, and \$41 million, respectively.
... The M&A's send positive signals to the market, suggesting great growth potentials of the industry, or indicating growing power for the merging firms to push up the product prices which the rivals will also benefit. Some empirical literature has documented the positive effect of takeover announcements on rival firm stock returns (Eckbo 1983(Eckbo , 1985Mitchell and Mulherin 1996;Servaes and Tamayo 2013). However, Derrien et al. (2017) suggest that rivals can lose value as losing competitive power, which can well happen when the targets are private, and the acquirer rivals would negatively react to the M&A announcements. ...
In this paper, I study trading activities prior to M&A announcements pertaining to the rivals of the merging firms. I find that not only acquirers and targets experience increases in abnormal trading activities in stock and option markets, but also their rivals. The rise in option trading is especially strong for options that informed traders are most likely to trade. I find that the implied volatility spread (IV spread) constructed from a rival’s option prices the day before the announcement can predict this rival’s cumulative abnormal return (CAR) over the M&A announcement window. As the IV spread is widely adopted as a proxy for informed trading activities in the option market, my findings provide evidence for information spillovers from merging firms to their rivals prior to the announcements of the M&A deals.
We analyse the financial sector consolidation in Asia by using a comprehensive sample of bank M&As from 1995 to 2021. Our results show that M&A announcements by Asian domestic acquirers are associated with significant positive stock price returns to both acquirers and their rivals. In contrast, cross‐border acquirers and their rivals experience negative but insignificant returns, while targets and their rivals record gains, regardless whether it is a domestic or cross‐border transaction. Further analyses reveal that domestic acquirers obtaining larger relative increases in their market share benefit the most, indicating that market power considerations are the primary driver behind acquirers' positive returns. For cross‐border acquirers, neither cultural differences nor regulatory arbitrage considerations can explain return patterns surrounding M&A announcements.
Valuation plays a central role in determining Chapter 11 reorganization outcomes. However, obtaining accurate valuation estimates of reorganized firms is challenging because of limited firm-specific market-based information and the oft-conflicting incentives of claimholders. We examine the role of industry peer information in reducing misvaluations and its implications for unintended interclaimant wealth transfers and postreorganization performance. First, we find that the availability of relevant industry peer information is negatively associated with equity valuation errors for firms emerging from Chapter 11. Cross-sectional results suggest that the relation between industry peer information and valuation errors varies substantially with debtors’ information environment and case characteristics. Second, we find that industry peer information quality is associated with better ex post financial performance of emerged firms because of lower overvaluation. Finally, we document the role of industry peer information in substantially reducing the frequency and magnitude of unintended wealth transfers between claimants arising from equity valuation errors.
This paper was accepted by Suraj Srinivasan, accounting.
Funding: The authors appreciate financial support from the Social Sciences and Humanities Research Council of Canada [Grant 435-2020-0583] and the Canadian Academic Accounting Association. B. Fang acknowledges financial support from the Della Suantio Fellowship.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01233 .
We examine the impact of product market competition on firms' systematic risk. Using a measure of total product market similarity, we document a strong negative relationship between market power and market betas. The effect more than triples in the most recent period of low competition. Anticompetitive mergers result in a significant reduction in market betas. Firms facing less competition seem to be partially insulated from systematic discount‐rate shocks. Lower equity costs therefore imply that market power is partly self‐perpetuating.
In this article, we examine the relation between independent directors with past military service and merger activity. We find that firms with a greater proportion of independent directors with military experience complete fewer mergers, and the deals are of smaller value. Our results are robust to instrumental variable estimation. The reduction in merger and acquisition activity is concentrated in firms with weak CEOs, suggesting independent directors with military service do not improve firm agency problems.
Acquisition announcements coincide with upward value revisions for the target firms’ technology peers, which are not due to economic relations based on product market, supply chain, or geographical location. Such a phenomenon is robust across subsample periods, not specific to merger or technology waves, and not related to product-market structure and the unique innovation features of certain technology-intensive industries. Firms experience more dramatic value revisions when they have deeper technology overlaps with their targets, are more dependent on technology, or when a transaction features higher premium or greater technology overlap between the acquirer and target. Our mechanism analysis provides evidence that is primarily consistent with the acquisition-probability hypothesis whereby acquisition announcements elevate expected technology synergies and merger prospects for peers and partially in line with the enhanced-investment hypothesis that peers’ revaluations correlate with increased technology investments. We do not find any evidence in line with the competition-balance hypothesis that attributes peers’ value revisions to the change in industrial competition intensity. Overall, our results demonstrate that acquisition announcements disseminate novel information about the value of technology that is of common interest among firms with close technologies.
This paper was accepted by Gustavo Manso, finance.
Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4890 .
Our paper provides a contribution to the literature on peer effects in leveraged buyouts and delivers an explanation for the seemingly contradicting findings in the existing literature. We find that the average peer announcement CAR amounts to −1.98%. A buyout may reveal private information about peer value and can also change in the competition within the buyout target industry. Our identification strategy to examine the information and competition channels relies on two quasi‐natural experiments, which generate exogenous variation in the information and competition environments. In addition, we analyze various mechanisms within these two channels by considering the cross‐section of peer CARs and by running additional tests. Our results support the revaluation and the competitive pressure hypotheses.
We examine whether and how firms structure their merger and acquisition deals to avoid antitrust scrutiny. There are approximately 40% more mergers and acquisitions (M&As) than expected just below deal value thresholds that trigger antitrust review. These “stealth acquisitions” tend to involve financial and governance contract terms that afford greater scope for negotiating and assigning lower deal values. We also show that the equity values, gross margins, and product prices of acquiring firms and their competitors increase following such acquisitions. Our results suggest that acquirers manipulate M&As to avoid antitrust scrutiny, thereby benefiting their own shareholders but potentially harming other corporate stakeholders.
This paper proposes a new algorithm to identify the potential effect of mergers by comparing the outcomes of interest in areas of overlap for the merging parties vis‐à‐vis areas where no overlap exists within a difference‐in‐differences estimation framework. Utilizing our proposed algorithm enables researchers and policymakers to perform retrospective merger evaluation studies that look at the effects of mergers on both price and non‐price aspects. We demonstrate the applicability and value of our proposed methodology by examining the effects on price and product variety of four mergers of the late 1980s and the 1990s on the U.K. car market.
Celebrity endorsement is a common advertising strategy, yet, as well-known scandals show, it is not without risk. Studies at the marketing–finance interface investigate how negative publicity surrounding a celebrity endorser affects firm value, though without determining how such events might spill over to the sponsor firms’ competitors and their stock prices. To address this research gap, the authors assess the impact of celebrity endorser scandals on competitor stock returns with an event study approach. The unique sample of 121 celebrity scandals over a 35-year period reveals a contagion effect, such that competitor firms experience negative stock returns on average, though not to the same extent. According to univariate and regression analyses, the more negative the event affects the sponsor company and the more homogeneous the industry, the stronger the negative spillover effect from a scandal. These findings show that a contagion effect is a likely scenario and offer recommendations for managers regarding how they should adapt their risk management processes and communicate with their boards and shareholders.
Using novel merger valuation data, we show that firms selected by investment banks as “comparable peers” are more than twice as likely to later become takeover targets themselves compared to matched control firms. Peer firms not subsequently acquired attract more institutional ownership and analyst coverage, deliver strong operating performance, reduce investments, and increase payouts. Investors are inattentive, though, to peer identification at the time of merger filings’ public disclosure. A portfolio that longs peers and shorts controls earns up to 15.6$\%$ alpha annually, which mainly comes from the long leg and is difficult to explain by short-sale constraints.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
This paper examines firms' post‐merger integration (PMI) strategy under price and service‐quality competition when facing either deterministic or stochastic demand. Although horizontal mergers are prevalent in practice and have been analyzed extensively in the literature, little attention has been paid to the choice of PMI level. We develop a game‐theoretic model, in which multiple firms compete on price and service quality with either deterministic or stochastic demand, and two of them decide whether and how to merge. The post‐merger firm can enjoy higher cost efficiency due to cost synergy and needs to choose between centralized and decentralized mergers (i.e., PMI level). A centralized merger allows centralized decision‐making and inventory pooling for the two participant firms, while a decentralized merger allows decentralized decision‐making and inventory transshipment between the participant firms. We highlight some interesting findings. First, under either deterministic or stochastic demand, we find that a centralized merger is not always beneficial since its collusion effect may induce the non‐participant firm to adopt more aggressive strategies, and thus a decentralized merger may be more profitable and preferred by the post‐merger firm as it allows competition between the participants and leads to a more balanced market. Second, in a decentralized merger, stronger fixed cost synergy may backfire and hurt each participant as it could intensify service‐quality competition between the two participants, and risk pooling (via inventory transshipment) under stochastic demand may even reduce the participant firms' profits as it may intensify both service‐quality and price competition. Third, a participant firm's service quality, price, and in‐stock probability may be either improved or reduced after merging, depending on the PMI level, cost synergy, demand sensitivity, and demand uncertainty. This article is protected by copyright. All rights reserved
The paper try to explore is there any relationship between acquisitions and stock price performance in short period of time. Mergers and acquisition has been adopted as one of the important strategy of corporate finance to create wealth for shareholders. There are plethora of studies in abroad pertaining to value creation to shareholders through mergers and acquisition. The literature of mergers indicate there is a mixed view in regard to wealth creation to shareholders. There is dearth of studies in Indian context whether mergers create value to shareholders or not. This motivates to explore whether there is any relationship of creating wealth to shareholders in short run. The objective of this study to find out whether acquisitions generate abnormal return to the shareholders of acquiring firms in Indian service sectors. The paper try to examine whether any positive return generated by firm because of acquisitions announcement in short run by using event study methodology. The study taken the domestic merger for the period from 2008-2014 to analyse the effect acquisition on shareholder wealth by using BSE listed company in Indian service sector. The results indicate there is positive abnormal return to the shareholders of the acquiring firms in event period of {-20, 20} days in Indian service industries.
Résumé
Le Tribunal de Première Instance des Communautés Européennes (TPICE) a récemment retoqué trois vetos des autorités communautaires de la concurrence. Au-delà du camouflet que représentent ces décisions, c'est principalement l'insuffisance de preuves et la faiblesse de l'analyse économique de la Commission Européenne qui sont à chaque fois critiquées. Afin d'évaluer la véracité de ces critiques, nous cherchons à analyser de manière précise si les décisions de la Commission sont corroborées par l'anticipation des marchés. Pour se faire, nous utilisons et étendons la méthodologie d'Eckbo-Stillman (1983), plus communément appelée méthode événementielle. Le principe de base en est simple. Il consiste à tester l'hypothèse de pouvoir de marché (ou de collusion) en analysant comment le cours des actions réagit à des événements importants. L'hypothèse testée est la suivante : si la concentration projetée est susceptible de réduire l'intensité de la concurrence (de se traduire par un surcroît d'efficacité), alors les firmes rivales doivent voir leur valeur boursière augmenter (baisser) lors de l'annonce d'un événement augmentant la probabilité de réalisation de la concentration et se déprécier (augmenter) lorsque la probabilité de survenance de celle-ci diminue. Nos résultats montrent que dans la majorité des affaires, il est impossible de valider l'hypothèse d'effets anti-concurrentiels.
This chapter examines recent developments in economic research relating to antitrust, paying specific attention to research in the areas of collusion and merger enforcement. Research relating to both collusion and mergers has made significant advances in the last twenty years. With respect to collusion, this includes important theoretical and empirical work on the sustainability, structure, and impact of collusive schemes. With respect to mergers, this includes important work on the impact of enforcement institutions, both theoretical and empirical work on unilateral effects, and theoretical work on the selection of which mergers get proposed to antitrust agencies and optimal policy in the face of that selection. A feature of recent research is the increasing complementarity between empirical work (ranging from observational studies to model-based measurement) and theoretical work in advancing our understanding of collusive and merger-related phenomena.
We exploit a quasi-natural experiment (the adoption of state anti-recharacterization laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions. We find that, following the passage of anti-recharacterization laws, firms decrease overall acquisition activities. This effect is stronger for firms with worse agency problems. Announcement returns to shareholders are larger and post-merger operating cash flows are better for acquirers with weaker governance. Furthermore, returns to bondholders of these firms are also higher, indicating no wealth transfers. Taken together, our evidence suggests that ex-ante strengthened creditor rights can discipline firm managers to reduce value-destroying acquisitions and conduct higher quality deals.
This paper examines how firms adjust cash holdings following horizontal mergers in the industry. Using a sample of 16,597 horizontal mergers between US firms from 1984 to 2016, we find that in the three-year period following horizontal mergers, the marginal value of cash decreases for the rivals with lower investment opportunities. Rivals with low Tobin's Q reduce cash while the rivals with high Tobin's Q hold more cash. These results suggest that rival firms adjust cash holdings in a pattern that is more consistent with their investment opportunities. We also examine possible explanations for the rivals' cash adjustments and discuss the rivals' competitive pressure following the horizontal mergers.
The increasing globalization of economies has leveraged protectionist attitudes in different countries during the last decades. In the context of cross-border mergers and acquisitions (M&A), national governments have intervened to “protect” big domestic firms and their industries from foreign bidders. Despite the potential for severe implications of these actions on the internationalization of firms and development of markets, the research in this area is relatively scarce, and we still know very little about the real causes and consequences of government intervention. In this paper, we study government opposition to cross-border European M&A during the period 1997-2017, an era of important changes in Europe. Using an event study methodology, we examine abnormal returns for targets and their rivals in the time period prior to actual intervention to gauge if investors perceive intervened deals as harmful events for the industry, which could justify government intervention. We use a hand collected sample of 1,574 EU15 rival firms for 48 mergers, of which 18 experience government intervention. Entropy balanced regression models show that rivals of intervened targets earn significantly lower returns relative to rivals of non-intervened targets on deal announcement. Nevertheless, rivals’ abnormal returns are not negative, suggesting that intervened deals are not perceived ex ante as harmful for industry competitiveness. The results are more consistent with investors’ ability to identify likely blocked deals, which puts downward pressure on abnormal returns to both the target companies and their rivals. These findings indicate that government interventions against foreign bidders seem to have an economic cost in the sector that is anticipated by the investors.
We examine the recent rise of institutional investment in the single-family home rental market and its implications for renters’ welfare. Using institutional mergers to identify local exogenous variation in institutional landlords’ scale and market share, we show that rents increase in neighborhoods where both merging firms owned properties (i.e., overlapped neighborhoods) relative to other nonoverlapped neighborhoods. Meanwhile, the crime rate also significantly decreases in overlapped neighborhoods after mergers. Our findings suggest that while institutional landlords leverage their market power to extract greater surplus from renters, they also improve the quality of rental services by enhancing neighborhood safety.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
This paper presents tests of the hypothesis that the relief imposed in antimerger cases is costly for defendant firms' stockholders. Previous research on this subject suggests that defendants' case-related losses are due entirely to legal expenses and the disruption of productive activity. In this paper it is shown that two out of five portfolios of defendant firms earn abnormal losses when final decisions in antimerger cases are announced. These losses are consistent with the imposition of costly constraints on some defendants by government antitrust enforcers. The tests also show that when acquisitions are canceled following antimerger complaints, the losses to the target firms are substantial and completely offset the gains generated when the acquisitions are proposed.
This paper provides evidence on the daily market reaction to the announcement and subsequent acceptance or rejection of merger proposals. There is a swift and large positive market reaction to the first public announcement of the merger proposal. Subsequently, there is a positive reaction to the approval of completed proposals and a negative reaction to cancelled proposals. Where proposals are vetoed by incumbent target management, there is a negative market reaction to the veto, but this does not eliminate the earlier positive reaction to the first announcement. In these proposals there is a permanent revaluation of the target shares. This is in contrast to cancelled proposals that incumbent managements do not veto, where the target stock price falls back, on average, to the preproposal level.
No one has the right, and few the ability, to lure economists into reading another article on oligopoly theory without some advance indication of its alleged contribution The present paper accepts the hypothesis that oligopolists wish to collude to maximize joint profits It seeks to reconcile this wish with facts, such as that collusion is impossible for many firms and collusion is much more effective in some circumstances than in others The reconciliation is found in the problem of policing a collusive agreement, which proves to be a problem in the theory of information A considerable number of implications of the theory are discussed, and a modest amount of empirical evidence is presented
A horizontal merger must result in higher product prizes to consumers to be anticompetitive or socially inefficient. Higher product prices, however, imply increased profits for rivals to the merging firms. Therefore, if a horizontal merger is to reduce consumer welfare, rival firms must rise in value at the time of events increasing the probability of the merger and fall in value when the probability of the merger declines. this paper uses daily stock return data from a sample of rivals to 11 horizontal mergers attempted between 1964 and 1972 that were challenged by the antitrust enforcement agencies. The paper tests the hypothesis that, but for the government's action, these mergers would have resulted in higher product prices. On balance, the data favor the null hypothesis of no anticompetitive effect.
Nonsynchronous trading of securities introduces into the market model a potentially serious econometric problem of errors in variables. In this paper properties of the observed market model and associated ordinary least squares estimators are developed in detail. In addition, computationally convenient, consistent estimators for parameters of the market model are calculated and then applied to daily returns of securities listed in the NYSE and ASE.
This article re-examines the magnitude of stockholder gains from merger. To measure stockholder gains we employ four alternative two-factor market-industry models in combination with a matched non-merging control group. The four two-factor models are based on either the capital asset pricing model or Black's (1972) zero-beta model combined with two alternative industry factors. The four models are shown to produce generally consistent results. However, the results from a two-factor model are sometimes different from the results of a simpler one-factor model. Also, the introduction of a third factor, the non-merging control group, is shown to have a substantial impact on performance measurement.
This study examines the market for acquisitions and the impact of mergers on the returns to the stockholders of the constituent firms. While employing the two-factor market model as recently developed and applied by Black-Jensen-Scholes and Fama-MacBeth, this study also considers changes in risk in analyzing the impact of mergers on stock prices. The results of the study are consistent with the hypothesis that the market for acquisitions is perfectly competitive and with the hypothesis that information regarding mergers is efficiently incorporated in the stock prices. Stockholders of acquiring firms seem to earn normal returns from mergers as from other investment-production activities with commensurate risk levels. Stockholders of acquired firms earn abnormal returns of approximately 14%, on the average, in the seven months preceding the merger.
Typescript (photocopy). Thesis (Ph. D.)--University of Rochester. Graduate School of Management, 1981. Includes vita and abstract. Includes bibliographical references (leaves 87-88).
While it is not possible to use security returns to measure the effects of existing regulation, it may be possible to use security prices for this purpose. If the firm receives economic rents as a result of regulation (for example, because of artificial barriers to new entry), the value of these rents will be included along with the value of the productive assets in determining the value of the firm. One way to measure the value of the rents received by the firm is to estimate the replacement cost of the assets of the firm and subtract it from the value of the securities of the firm. Sometimes a more direct measure of the effect of existing regulation is available. If regulation creates and enforces a marketable license, such as a taxicab medallion, the price of this specialized factor of production (which has no value in any alternative use) is a direct measure of the value of the economic rents created by the artificial barrier to entry. Section II discussed tests for the effects of unanticipated changes in the regulation of individual firms or industries. Section III discusses methods for measuring the effects of existing or anticipated regulation. Tests for the effects of changes in the regulation of securities markets are discussed in Section IV. Finally, Section V presents some concluding remarks. Each section of the paper is organized to stress three related areas: (1) methodological issues concerning the analysis and interpretation of security price data in the context of regulatory questions, (2) examples illustrating existing analyses of regulation or industrial organization issues using security price data, and (3) suggestions for future work where the techniques discussed in this paper would be fruitful.
This paper studies the net effects of the long-run sequence of events leading to merger, and of merger per se, on shareholder wealth. The appropriate measure of the wealth effect is shown to be the abnormal dollar return cumulated over time. Using this measure, the long-run wealth effect of the event sequence culminating in merger is significantly negative for acquiring firms. For acquired firms, the effect is negative, but not significant. The immediate impact of merger per se is positive and highly significant for acquired firms but larger in absolute value, and negative for acquiring firms. The evidence also reveals that measured abnormal rates of return to acquiring firms are sensitive to a slight variation in model specification and dependent on firm size, with smaller firms earning significantly negative post-merger returns.
We measure the impact of acquisitions activity on firm value by differentiating between specific merger events and programs of acquisition activity. Based on a sample of conglomerate acquirers, we find significantly positive abnormal performance associated with the announcement of acquisitions programs and significantly negative performance associated with certain institutional changes of 1967–1970 relating to acquisition activity (the Williams Amendments, the 1969 Tax Reform Act, and APB Opinions 16 and 17). Our results support the hypotheses that acquisitions activity had a favorable ex ante impact on the value of firms announcing an intention to engage in acquisitions, and that some of the institutional changes reduced the expected profitability of future acquisitions activity. The basic results of studies of mergers and tender offers are reviewed and their consistency with our findings highlighted.
THE CELLER-KEFAUVER AMENDMENT of 1950 revitalized the antimerger statute contained in Section 7 of the Clayton Act.' An unparalleled wave of merger activity after this revision [17] was accompanied by an acceleration of antimerger law enforcement activities [21]. Notwithstanding the importance of these developments, there has been no systematic attempt to ascertain the effects of the enforcement experience on the wealth position of affected stockholders. This paper examines the risk and return characteristics of 205 large corporations whose merger activities were challenged by the Antitrust Division of the Department of Justice or the Federal Trade Commission over the period 1950-1972. The stock price and dividend records of these companies are examined for evidence of abnormal rate of return behaviour before and after the issuance of Section 7 complaints. The impact of the divestiture program is studied and comparisons are made to the returns realized by stockholders in companies whose merger activity was not challenged under the antitrust law. The following section presents some competing hypotheses on the relationships between merger activity, antitrust enforcement and the pattern of stockholder returns. Research methodology, data sources, and sample selection are discussed in Section II and in the Appendix. The empirical evidence is presented and analyzed in Section III. The results are summarized in Section IV.
An application of a three-factor performance index to measure stockholders gains from merger
- T Langteig
Langteig, T, 1978, An application of a three-factor performance index to measure stockholders
gains from merger, Journal of Financial Economics 6, 365–384.
Examining the anti-competitive significance of large horizontal mergers, Center for Research in Government Policy and Business Thesis Series CTS-1
- B Eckbo
- Espen
Eckbo, B. Espen, 1981, Examining the anti-competitive significance of large horizontal mergers,
Center for Research in Government Policy and Business Thesis Series CTS-1, University of
Rochester.