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Mergers, Diversification and Financial Intermediation

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  • Flaxio Toxvaerd

    (Hebrew University of Jerusalem)

Abstract

This work presents an equilibrium model of diversification through merger formation. Due to moral hazard problems, poorly capitalized firms are credit rationed and may seek to alleviate the incentive problem (and thereby raise external funds) by either merging, employing a monitor or a combination of the two. Within this setting, the effects on merger activity of different kinds of capital tightening are studied. In particular, credit crunches, collateral squeezes and savings squeezes are analyzed. The main results are that diversifying merger activity increases during times of economic expansion and is positively related to aggregate economic activity, business incorporations and easing of access to credit (both interest and non-interest terms of credit). Furthermore, the model offers a rationale for diversification that is immune to the diversification neutrality result and furthermore, explains why diversified companies trade at a discount relative to their non-diversified counterparts.

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 43.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:43

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Cited by:
  1. Toxvaerd, Flavio, 2007. "Strategic Merger Waves: A Theory of Musical Chairs," CEPR Discussion Papers 6159, C.E.P.R. Discussion Papers.

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