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The Dynamics of Mergers and Acquisitions in Oligopolistic Industries

  • Dirk Hackbarth

    ()

    (Department of Finance, Olin School of Business, Washington University in St. Louis)

  • Jianjun Maio

    ()

    (Department of Economics, Boston University and Department of Finance, the Hong Kong University of Science and Technology)

This paper develops a continuous time real options model to study the interaction between industry structure and takeover activity. In an asymmetric industry equilibrium, firms have an endogenous incentive to merge when restructuring decisions are motivated by operating and strategic benefits. The model predicts that (i) the likelihood of restructuring activities is greater in more concentrated industries or in industries that are more exposed to exogenous shocks; and (ii) the magnitude of returns arising from restructuring to both merger firms and rival firms are higher in more concentrated industries. While recent real options models contend that competition erodes the option value of waiting and hence accelerates the timing of mergers, in our model, increased competition delays the timing of mergers.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2007-017.

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Length: 32pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:bos:wpaper:wp2007-017
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