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Cross-border mergers with flexible policy regime: The role of efficiency and market size

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  • Fikru, Mahelet G.
  • Lahiri, Sajal

Abstract

This study provides a theoretical and empirical framework for understanding the determinants of cross-border mergers. Past literature has focused on the effect of trade liberalization as the key factor triggering international mergers. We introduce the idea of flexible policy regime in which optimal policies are sensitive to whether a cross-border acquisition has taken place or not. In a free-trade model given asymmetries in marginal cost, we find that optimal subsidies decline when firms acquire inefficient foreign firms while optimal subsidies increase when firms acquire efficient firms. We also find that as the efficiency of the acquirer increases, the profitability of the acquisition and hence the likelihood that it takes place also increases. We find that the role of market size in triggering cross-border acquisitions may be limited even with free trade.

Suggested Citation

  • Fikru, Mahelet G. & Lahiri, Sajal, 2014. "Cross-border mergers with flexible policy regime: The role of efficiency and market size," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 58-70.
  • Handle: RePEc:eee:jjieco:v:34:y:2014:i:c:p:58-70
    DOI: 10.1016/j.jjie.2014.05.001
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    References listed on IDEAS

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    Cited by:

    1. Fikru, Mahelet G. & Gautier, Luis, 2016. "Mergers in Cournot markets with environmental externality and product differentiation," Resource and Energy Economics, Elsevier, vol. 45(C), pages 65-79.

    More about this item

    Keywords

    Production tax; Flexible policy; Market size; Japan; OECD; Efficiency;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • F - International Economics

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