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

  • Sven-Olof Fridolfsson

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

  • Johan Stennek

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

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.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 5 (09)
Pages: 1083-1104

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Handle: RePEc:tpr:jeurec:v:3:y:2005:i:5:p:1083-1104
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