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Mergers, Spinoffs, and Employee Incentives


  • Paolo Fulghieri
  • Merih Sevilir


This article studies mergers between competing firms and shows that while such mergers reduce the level of product market competition, they may have an adverse effect on employee incentives to innovate. In industries where value creation depends on innovation and development of new products, mergers are likely to be inefficient even though they increase the market power of the post-merger firm. In such industries, a stand-alone structure where independent firms compete both in the product market and in the market for employee human capital leads to a greater profitability. Furthermore, our analysis shows that multidivisional firms can improve employee incentives and increase firm value by reducing firm size through a spinoff transaction, although doing so eliminates the economies of scale advantage of being a larger firm and the benefits of operating an internal capital market within the firm. Finally, our article suggests that established firms can benefit from creating their own competition in the product and labor markets by accommodating new firm entry, and the desire to do so is greater at the intermediate stages of industry/product development. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail:, Oxford University Press.

Suggested Citation

  • Paolo Fulghieri & Merih Sevilir, 2011. "Mergers, Spinoffs, and Employee Incentives," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2207-2241.
  • Handle: RePEc:oup:rfinst:v:24:y:2011:i:7:p:2207-2241

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    References listed on IDEAS

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    Cited by:

    1. repec:ssi:jouesi:v:5:y:2017:i:1:p:116-126 is not listed on IDEAS
    2. Giovanna Nicodano & Luca Regis, 2014. "Complex organizations, tax policy and financial stability," Carlo Alberto Notebooks 359, Collegio Carlo Alberto, revised 2015.
    3. Liang, H. & Renneboog, Luc, 2017. "Corporate Employee-Engagement and Merger Outcomes," Discussion Paper 2017-011, Tilburg University, Center for Economic Research.
    4. Liang, Hao & Renneboog, Luc & Vansteenkiste, Cara, 2017. "Cross-Border Acquisitions and Employee-Engagement," Discussion Paper 2017-038, Tilburg University, Center for Economic Research.
    5. repec:oup:rcorpf:v:4:y:2015:i:1:p:43-68. is not listed on IDEAS
    6. Michela Altieri & Giovanna Nicodano, 2016. "The Apparent Diversification Discount," Carlo Alberto Notebooks 465, Collegio Carlo Alberto.
    7. Giovanna Nicodano & Luca Regis, 2017. "A Trade-off Theory of Ownership and Capital Structure," Working papers 045, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.

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