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The Aggregate Implications of Mergers and Acquisitions

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  • Joel David

    (UCLA)

Abstract

Mergers and acquisitions can play a transformative role in the evolution of firms and industries and have become an important feature of the US economy, representing about 5% of GDP and 80% of total capital reallocation among large US firms. In this paper, I develop a search-theoretic model of mergers and acquisitions in a dynamic general equilibrium setting and assess the implications for aggregate economic performance. I use a transaction-level dataset to document a number of empirical patterns in US merger activity: (1) acquiring firms are generally larger and more profitable than their targets; (2) there is a large degree of positive assortative matching between transacting firms; and (3) acquirers tend to be the largest and most profitable firms, but targets are not the smallest or least profitable. I build a parsimonious model that is able to address these facts and nests several existing theories of merger activity as special cases. I explore the merger patterns predicted by these theories and show that each meets difficulties in fitting the full set of empirical facts. I calibrate the model to match moments from the transaction-level data, as well as other salient features of the US economy. The calibrated model is capable of replicating the stylized facts quite closely and sheds new light as to how surplus is generated from merger and how the gains are split. I find that merger activity generates potentially large long-run gains in aggregate performance, measuring about 30% in aggregate productivity and output, and about 11% in welfare.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1178.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1178

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  1. Audra L. Boone & J. Harold Mulherin, 2007. "How Are Firms Sold?," Journal of Finance, American Finance Association, vol. 62(2), pages 847-875, 04.
  2. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," Discussion Papers 07-006, Stanford Institute for Economic Policy Research.
  3. Matthew Rhodes-Kropf & David T. Robinson, 2008. "The Market for Mergers and the Boundaries of the Firm," Journal of Finance, American Finance Association, vol. 63(3), pages 1169-1211, 06.
  4. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and decentralized price competition," LSE Research Online Documents on Economics 29705, London School of Economics and Political Science, LSE Library.
  5. Gordon M Phillips & Vojislav Maksimovic, 1999. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are there Efficiency Gains?," Working Papers 99-12, Center for Economic Studies, U.S. Census Bureau.
  6. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  8. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
  9. Ariel Burstein & Andrew Atkeson, 2009. "Innovation, Firm Dynamics, and International Trade," 2009 Meeting Papers 186, Society for Economic Dynamics.
  10. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  11. Ahern, Kenneth R., 2012. "Bargaining power and industry dependence in mergers," Journal of Financial Economics, Elsevier, vol. 103(3), pages 530-550.
  12. Whinston, Michael D., 2007. "Antitrust Policy toward Horizontal Mergers," Handbook of Industrial Organization, Elsevier.
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