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Effect of Research and Development and Market Concentration on Merger Outcomes -- An Event Study of U.S. Horizontal Mergers

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  • Ralph M. Sonenshine
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    Abstract

    This study examines the pattern of abnormal returns for merging companies and rivals to determine investor expectations regarding the impact of horizontal mergers challenged by the government. Prior studies have indicated that the government may have challenged efficiency-enhancing mergers as evidenced by the pattern of abnormal returns to rivals during merger events. This study examines those patterns using challenged mergers from 1997 to 2007, and it adds to the literature by assessing the effect that R&D intensity and change in HHI have on the returns to rivals and merging firms. The paper finds that the pattern of abnormal returns is a result of the different effects that antitrust complaints and merger outcomes have on rivals based on R&D intensity and change in industry concentration. This finding suggests that the government may have been properly vigilant in challenging mergers over the past 10 years in basic industries that have high levels of market concentration. However, it also may have allowed collusive mergers to proceed in R and D intensive industries.

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    File URL: http://www.american.edu/cas/economics/pdf/upload/Working-Paper-16.pdf
    File Function: First version, 2009
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    Paper provided by American University, Department of Economics in its series Working Papers with number 2009-16 JEL classification: L10, L40.

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    Date of creation: Aug 2009
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    Handle: RePEc:amu:wpaper:2009-16
    Contact details of provider: Web page: http://www.american.edu/cas/economics/

    Keywords: mergers; Research and Development; Strategic Protection; market concentration; event study;

    This paper has been announced in the following NEP Reports:

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    1. Ellert, James C, 1976. "Mergers, Antitrust Law Enforcement and Stockholder Returns," Journal of Finance, American Finance Association, vol. 31(2), pages 715-32, May.
    2. Wesley M. Cohen & Richard C. Levin & David C. Mowery, 1987. "Firm Size and R&D Intensity: A Re-Examination," NBER Working Papers 2205, National Bureau of Economic Research, Inc.
    3. Stewart, John F & Harris, Robert S & Carleton, Willard T, 1984. "The Role of Market Structure in Merger Behavior," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 293-312, March.
    4. 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.
    5. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    6. Daniel Hosken & John David Simpson, 2001. "Have Supermarket Mergers Raised Prices? An Event Study Analysis," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 8(3), pages 329-342.
    7. Michael Cichello & Douglas Lamdin, 2006. "Event Studies and the Analysis of Antitrust," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(2), pages 229-245.
    8. 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.
    9. Lamdin, Douglas J., 2001. "Implementing and interpreting event studies of regulatory changes," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 171-183.
    10. Fee, C. Edward & Thomas, Shawn, 2004. "Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms," Journal of Financial Economics, Elsevier, vol. 74(3), pages 423-460, December.
    11. Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
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