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The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia


Author Info

  • Dennis C. Mueller

    (Department of Economics, University of Vienna, BWZ-Bruenner Strasse 72, A-1210 Vienna, Austria)

  • Mark L. Sirower

    (Boston Consulting Group, 135 E. 57th St., New York, NY 10022, USA, and New York University)


Despite the large number of event studies of mergers that have been undertaken, considerable disagreement still exists over whether mergers increase the value of the merging firms, and if so why. Most event studies measure the average returns to the acquired and acquiring companies' shareholders separately, and based on these averages conclude either that mergers increase wealth, or that they reduce it. From this the authors go on to claim support either for a hypothesis about how mergers increase efficiency, or for one that claims they do not. This paper develops a methodology that uses the distribution of gains and losses across the two samples of firms, and their relationship to one another to test four hypotheses about why mergers occur: (1) the market-for-corporate-control hypothesis, (2) the synergy hypothesis, (3) the managerial discretion hypothesis, and (4) the hubris hypothesis. The hypotheses are tested with data for 168 mergers between large companies from 1978 through 1990. Considerable support is found for the managerial discretion and hubris hypotheses, and some support is found for the market-for-corporate-control hypothesis. Little or no support is found for the hypothesis that mergers create synergies and that shareholders of both the acquiring and acquired firms share gains from these synergies. Copyright © 2003 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 24 (2003)
Issue (Month): 5 ()
Pages: 373-391

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Handle: RePEc:wly:mgtdec:v:24:y:2003:i:5:p:373-391

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  1. Steven Kaplan & Michael S. Weisbach, 1990. "The Success of Acquisitions: Evidence From Disvestitures," NBER Working Papers 3484, National Bureau of Economic Research, Inc.
  2. Smith, Richard L & Kim, Joo-Hyun, 1994. "The Combined Effects of Free Cash Flow and Financial Slack on Bidder and Target Stock Returns," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 67(2), pages 281-310, April.
  3. Mueller, Dennis C, 1969. "A Theory of Conglomerate Mergers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 83(4), pages 643-59, November.
  4. Miles, David, 1993. "Testing for Short Termisn in the UK Stock Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(421), pages 1379-96, November.
  5. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(2), pages 197-216, April.
  6. Geroski, P. A., 1984. "On the relationship between aggregate merger activity and the stock market," European Economic Review, Elsevier, Elsevier, vol. 25(2), pages 223-233, July.
  7. Gort, Michael & Hogarty, Thomas F, 1970. "New Evidence on Mergers," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 13(1), pages 167-84, April.
  8. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  9. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 21(1), pages 3-40, May.
  10. Mueller, Dennis C., 1977. "The effects of conglomerate mergers : A survey of the empirical evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 1(4), pages 315-347, December.
  11. Sicherman, Neil W & Pettway, Richard H, 1987. " Acquisition of Divested Assets and Shareholders' Wealth," Journal of Finance, American Finance Association, American Finance Association, vol. 42(5), pages 1261-73, December.
  12. Lys, Thomas & Vincent, Linda, 1995. "An analysis of value destruction in AT&T's acquisition of NCR," Journal of Financial Economics, Elsevier, Elsevier, vol. 39(2-3), pages 353-378.
  13. Piper, Thomas R & Weiss, Steven J, 1974. "The Profitability of Multibank Holding Company Acquisitions," Journal of Finance, American Finance Association, American Finance Association, vol. 29(1), pages 163-74, March.
  14. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1605-21, September.
  15. Mueller,Dennis C., 1986. "Profits in the Long Run," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521306935.
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Cited by:
  1. Klaus Gugler & Dennis C. Mueller & B. Burçin Yurtoglu, 2006. "The Determinants of Merger Waves," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) SP II 2006-01, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  2. Chi, Jing & Sun, Qian & Young, Martin, 2011. "Performance and characteristics of acquiring firms in the Chinese stock markets," Emerging Markets Review, Elsevier, Elsevier, vol. 12(2), pages 152-170, June.
  3. Ivaldi, Marc & Motis, Jrissy, 2007. "Mergers as Auctions," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 461, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Díaz Díaz, Belén & Sanfilippo Azofra, Sergio & López Gutiérrez, Carlos, 2013. "Synergies or overpayment in European corporate M&A," MPRA Paper 51070, University Library of Munich, Germany.
  5. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin, 2008. "Insider ownership, ownership concentration and investment performance: An international comparison," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(5), pages 688-705, December.
  6. Dennis C. Mueller & B. Burcin Yurtoglu, 2007. "Corporate governance and the returns to acquiring firms' shareholders: an international comparison," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(8), pages 879-896.


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