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A Re-Examination Of Event Studies Applied To Challenged Horizontal Mergers

  • Hopkins, Yvette S.
  • Connor, John M.

A growing body of empirical studies have been interpreted as support for a laissez-faire policy towards mergers. These "event studies" examine the reaction of stock market prices of firms that announce an agreement to merge. The type ~f reaction reveals whether a merger is motivated by a desire for market power or purely to improve market efficiency. In this paper, a version of the capital asset pricing model (CAPM) is applied to determine if abnormal returns are earned by rivals of 22 pairs of firms whose attempted horizontal mergers were challenged by the federal antitrust agencies. At most eight, and possibly only five, of the cases were found to be motivated by efficiency in seeking merger, and at most six, and possibly only one, were motivated by market power; the rest were inconclusive. The event-study technique is highly flawed for the study of business-regulation effects. Numerous unrealistic assumptions, inappropriate data constraints, and questionable interpretations hamper .the application of this technique to policy analysis.

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File URL: http://purl.umn.edu/116105
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Paper provided by Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance in its series Working Papers with number 116105.

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Date of creation: Jun 1992
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Handle: RePEc:ags:rpspwp:116105
Contact details of provider: Postal: Draper Hall, College of Food and Natural Resources, Amherst, MA 01003
Web page: http://www.umass.edu/ne165/
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  1. Eckbo, B Espen & Wier, Peggy, 1985. "Antimerger Policy under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis," Journal of Law and Economics, University of Chicago Press, vol. 28(1), pages 119-49, April.
  2. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
  3. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
  4. Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
  5. Stigler, George J, 1982. "The Economists and the Problem of Monopoly," American Economic Review, American Economic Association, vol. 72(2), pages 1-11, May.
  6. Halpern, Paul, 1983. " Corporate Acquisitions: A Theory of Special Cases? A Review of Event Studies Applied to Acquisitions," Journal of Finance, American Finance Association, vol. 38(2), pages 297-317, May.
  7. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  8. Stillman, Robert, 1983. "Examining antitrust policy towards horizontal mergers," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 225-240, April.
  9. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
  10. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  11. Ellert, James C, 1976. "Mergers, Antitrust Law Enforcement and Stockholder Returns," Journal of Finance, American Finance Association, vol. 31(2), pages 715-32, May.
  12. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
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