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Do horizontal mergers affect rivals’ cash holdings?

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  • Hu, Xiaoxue
  • Li, Dongxu

Abstract

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.

Suggested Citation

  • Hu, Xiaoxue & Li, Dongxu, 2022. "Do horizontal mergers affect rivals’ cash holdings?," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 275-298.
  • Handle: RePEc:eee:reveco:v:82:y:2022:i:c:p:275-298
    DOI: 10.1016/j.iref.2022.06.011
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    More about this item

    Keywords

    Horizontal merger; Cash; Investment opportunity; Industry competition;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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