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Preemptive Horizontal Mergers: Theory and Evidence

  • Jozsef Molnar

    ()

    (Department of Economics, Northwestern University)

This paper proposes an explanation of why it can be rational for the profit-maximizing managers of an acquiring firm to conduct a takeover, even when doing so reduces shareholder value. If a firm fears that one of its rivals will gain competitive advantage from taking over some third firm, i can be rational for the first firm to preempt this merger with a takeover attempt of its own. This attempt can be optimal even if it requires the first firm to “overpay” relative to the increase in the joint profits of the combined firms. The paper first presents a model formalizing the above intuition. Then an event study is conducted to test the preemption theory. The empirical results are consistent with the predictions of the preemption theory, as opposed to the alternatives of hubris and agency theories.

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File URL: http://econ.core.hu/doc/dp/dp/mtdp0213.pdf
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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0213.

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Length: 47 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:has:discpr:0213
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