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Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers

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  • Sven-Olof Fridolfsson

    (The Research Institute of Industrial Economics (IUI), Stockholm)

  • Johan Stennek

    (The Research Institute of Industrial Economics (IUI), Stockholm)

Abstract

We provide a possible explanation for the empirical puzzle that mergers often reduce profits, but raise share prices. If being an "insider" is better than being an "outsider", firms may merge to preempt their partner merging with a rival. The insiders' stock market value is increased, since the risk of becoming an outsider is eliminated. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared. (JEL: L13, L41, G34, C78) Copyright (c) 2005 by the European Economic Association.

Suggested Citation

  • Sven-Olof Fridolfsson & Johan Stennek, 2005. "Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1083-1104, September.
    • Handle: RePEc:tpr:jeurec:v:3:y:2005:i:5:p:1083-1104
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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