Increased entry threat and merger activity

This paper examines whether and how increased entry threat drives industry merger activity. We use the reduction in import tariffs as a natural experiment of exogenous increase in competitive intensity and study its effect on merger and acquisition (M&A) decisions. Our results indicate that competition drives M&As towards more efficient resource allocation. We first document that increased entry threat intensifies takeover activity, consistent with the argument that M&As are an efficient reaction to economic shocks. We also find that, after import tariff reductions, the selection of targets outside the industry becomes more efficient and industry rivals react more positively to those deals, suggesting that efficient non-horizontal deals signal the existence of investment opportunities outside the industry for the industry peers.