Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2012

Abstract

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. We show that the U-shaped relation between the state of demand and the propensity of firms to merge, documented in past studies, is driven by horizontal mergers in industries that are: (1) relatively more concentrated, (2) characterized by relatively strong competitive interaction among firms, and (3) characterized by relatively low merger-related operating synergies and restructuring costs. The empirical evidence, based on parametric and semi-parametric regression analyses, is consistent with these predictions.

Keywords

horizontal mergers, competition, strategic interaction, real options

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

Review of Finance

Volume

16

Issue

2

First Page

517

Last Page

575

ISSN

1572-3097

Identifier

10.1093/rof/rfr013

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