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Why mergers reduce profits, and raise share prices: A theory of preemptive mergers

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  • FRIDOLFSSON, Sven-Olof
  • STENNEK, Johan

Abstract

We provide a possible explanation for the empirical puzzle that mergers often reduce profits, but raise share prices. If being an "in- sider" 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.

Suggested Citation

  • FRIDOLFSSON, Sven-Olof & STENNEK, Johan, 1999. "Why mergers reduce profits, and raise share prices: A theory of preemptive mergers," Working Papers 1999018, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:1999018
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    References listed on IDEAS

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    More about this item

    Keywords

    Mergers; Acquisitions; Defensive mergers; Coalition formation; Antitrust;

    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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