Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers
AbstractWe provide a possible explanation for the empirical puzzle that mergers often reduce profits, but raise share prices. If being an "insider" is better than being an "outsider", firms may merge to preempt their partner merging with a rival. The insiders' stock market value is increased, since the risk of becoming an outsider is eliminated. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared. (JEL: L13, L41, G34, C78) Copyright (c) 2005 by the European Economic Association.
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Bibliographic InfoArticle provided by MIT Press in its journal Journal of the European Economic Association.
Volume (Year): 3 (2005)
Issue (Month): 5 (09)
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Web page: http://www.mitpressjournals.org/jeea
Other versions of this item:
- Sven-Olof Fridolfsson & Johan Stennek, 2001. "Why Mergers Reduce Profits and Raise Share Prices: A Theory of Preemptive Mergers," CIG Working Papers FS IV 01-26, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Fridolfsson S.O. & Stennek J., 1999. "Why mergers reduce profits, and raise share prices: A theory of preemptive mergers," Working Papers 1999018, University of Antwerp, Faculty of Applied Economics.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
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