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Financial Structure and Mergers

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We study how corporate debt influences the competitive outcomes of horizontal and conglomerate mergers. In contrast to standard models where debt does not affect pricing, our framework shows that mergers can spread fixed debt obligations across a broader product portfolio, creating an "insurance effect" against adverse demand shocks. This effect interacts with the traditional recapture effect from reduced competition. Using numerical simulations and a case study of a major casino merger, we find that debt can either dampen or amplify post-merger price increases, depending on the merger's structure and the market environment.

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  • Charles Taragin & Benjamin Wallace & Eddie Watkins, 2025. "Financial Structure and Mergers," Finance and Economics Discussion Series 2025-080, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-80
    DOI: 10.17016/FEDS.2025.080
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    File URL: https://www.federalreserve.gov/econres/feds/files/2025080pap.pdf
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    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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