Efficient Horizontal Mergers: The Effects of Internal Capital Reallocation and Organizational Form
AbstractThis paper provides a theoretical ratification of efficiency of internal capital markets. The efficiency of internal capital market is examined in the context of horizontal mergers. In Cournot oligopoly, merged firms often optimally select the multidivisional structure in which competition among the merging partners remains in production while the headquarters establishes strong central control over resource allocation to the divisions. Under this structure, mergers not only combine the merging partners' capital, but also provide the merged firm with a new opportunity to reallocate that capital in an efficient way. Horizontal mergers are profitable due to the efficiency of internal capital markets. Such horizontal mergers also enhance market competition. I discuss the conditions under which the multidivisional structure (the M-form) is optimal for the merged firm while complete fusion of all the merging partners under a single authority is also feasible.
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Bibliographic InfoPaper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0522.
Date of creation: Aug 2005
Date of revision:
Other versions of this item:
- Mialon, Sue H., 2008. "Efficient horizontal mergers: The effects of internal capital reallocation and organizational form," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 861-877, July.
- NEP-ALL-2005-10-16 (All new papers)
- NEP-COM-2005-10-17 (Industrial Competition)
- NEP-FMK-2005-11-07 (Financial Markets)
- NEP-IND-2005-10-29 (Industrial Organization)
- NEP-MIC-2005-10-16 (Microeconomics)
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