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Channels of Firm Adjustment: Theory and Empirical Evidence

  • Holger Breinlich


  • Stefan Niemann


We provide a comprehensive analysis of how firms choose between different expansion and contraction forms, unifying existing approaches from the industrial organization and corporate finance literature. Using novel data covering almost the entire universe of UK firms, we document firms� use of internal adjustment, greenfield investment and mergers and acquisitions (M&As). We describe frequency and aggregate importance of the different channels, and show that their use varies systematically with observable firm characteristics, in particular firm size and the magnitude of adjustment. We also demonstrate that there is positive assortative matching on the UK merger market. Based on these facts, we propose a theoretical framework which accommodates all three adjustment channels in a unified setting, and is able to replicate the adjustment and matching patterns found in the data.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 697.

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Date of creation: 23 Sep 2011
Date of revision:
Handle: RePEc:esx:essedp:697
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Order Information: Postal: Discussion Papers Administrator, Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K.

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  1. Boyan Jovanovic & Peter L. Rousseau, 2008. "Mergers as Reallocation," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 765-776, November.
  2. repec:bla:restud:v:77:y:2010:i:1:p:188-217 is not listed on IDEAS
  3. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-32, Nov.-Dec..
  4. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
  5. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Restructuring and productivity growth in uk manufacturing," Economic Journal, Royal Economic Society, vol. 113(489), pages 666-694, 07.
  6. Warusawitharana, Missaka, 2008. "Corporate asset purchases and sales: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 87(2), pages 471-497, February.
  7. John Mullahy & Stephanie A. Robert, 2008. "No Time to Lose? Time Constraints and Physical Activity," NBER Working Papers 14513, National Bureau of Economic Research, Inc.
  8. Boyan Jovanovic & Peter L. Rousseau, 2002. "The Q-Theory of Mergers," American Economic Review, American Economic Association, vol. 92(2), pages 198-204, May.
  9. Carsten Eckel & J. Peter Neary, 2006. "Multi-product firms and flexible manufacturing in the global economy," Working Papers 200608, School of Economics, University College Dublin.
  10. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 3-26, Summer.
  11. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
  12. Marcus Asplund & Volker Nocke, 2003. "Firm Turnover in Imperfectly Competitive Markets," PIER Working Paper Archive 03-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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