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The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia

  • Dennis C. Mueller

    (Department of Economics, University of Vienna, BWZ-Bruenner Strasse 72, A-1210 Vienna, Austria)

  • Mark L. Sirower

    (Boston Consulting Group, 135 E. 57th St., New York, NY 10022, USA, and New York University)

Despite the large number of event studies of mergers that have been undertaken, considerable disagreement still exists over whether mergers increase the value of the merging firms, and if so why. Most event studies measure the average returns to the acquired and acquiring companies' shareholders separately, and based on these averages conclude either that mergers increase wealth, or that they reduce it. From this the authors go on to claim support either for a hypothesis about how mergers increase efficiency, or for one that claims they do not. This paper develops a methodology that uses the distribution of gains and losses across the two samples of firms, and their relationship to one another to test four hypotheses about why mergers occur: (1) the market-for-corporate-control hypothesis, (2) the synergy hypothesis, (3) the managerial discretion hypothesis, and (4) the hubris hypothesis. The hypotheses are tested with data for 168 mergers between large companies from 1978 through 1990. Considerable support is found for the managerial discretion and hubris hypotheses, and some support is found for the market-for-corporate-control hypothesis. Little or no support is found for the hypothesis that mergers create synergies and that shareholders of both the acquiring and acquired firms share gains from these synergies. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1103
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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 24 (2003)
Issue (Month): 5 ()
Pages: 373-391

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Handle: RePEc:wly:mgtdec:v:24:y:2003:i:5:p:373-391
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Smith, Richard L & Kim, Joo-Hyun, 1994. "The Combined Effects of Free Cash Flow and Financial Slack on Bidder and Target Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(2), pages 281-310, April.
  2. Mueller, Dennis C., 1977. "The effects of conglomerate mergers : A survey of the empirical evidence," Journal of Banking & Finance, Elsevier, vol. 1(4), pages 315-347, December.
  3. Lys, Thomas & Vincent, Linda, 1995. "An analysis of value destruction in AT&T's acquisition of NCR," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 353-378.
  4. David Miles, 1992. "Testing for short-termism in the UK stock market," Bank of England working papers 4, Bank of England.
  5. Geroski, P. A., 1984. "On the relationship between aggregate merger activity and the stock market," European Economic Review, Elsevier, vol. 25(2), pages 223-233, July.
  6. Mueller, Dennis C, 1969. "A Theory of Conglomerate Mergers," The Quarterly Journal of Economics, MIT Press, vol. 83(4), pages 643-59, November.
  7. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
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  9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  10. Gort, Michael & Hogarty, Thomas F, 1970. "New Evidence on Mergers," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 167-84, April.
  11. repec:cup:cbooks:9780521306935 is not listed on IDEAS
  12. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-21, September.
  13. Piper, Thomas R & Weiss, Steven J, 1974. "The Profitability of Multibank Holding Company Acquisitions," Journal of Finance, American Finance Association, vol. 29(1), pages 163-74, March.
  14. Sicherman, Neil W & Pettway, Richard H, 1987. " Acquisition of Divested Assets and Shareholders' Wealth," Journal of Finance, American Finance Association, vol. 42(5), pages 1261-73, December.
  15. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
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