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The Aggregate Implications of Mergers and Acquisitions

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  • Joel David

    (UCLA)

Abstract

Mergers and acquisitions can play a transformative role in the evolution of firms and industries and have become an important feature of the US economy, representing about 5% of GDP and 80% of total capital reallocation among large US firms. In this paper, I develop a search-theoretic model of mergers and acquisitions in a dynamic general equilibrium setting and assess the implications for aggregate economic performance. I use a transaction-level dataset to document a number of empirical patterns in US merger activity: (1) acquiring firms are generally larger and more profitable than their targets; (2) there is a large degree of positive assortative matching between transacting firms; and (3) acquirers tend to be the largest and most profitable firms, but targets are not the smallest or least profitable. I build a parsimonious model that is able to address these facts and nests several existing theories of merger activity as special cases. I explore the merger patterns predicted by these theories and show that each meets difficulties in fitting the full set of empirical facts. I calibrate the model to match moments from the transaction-level data, as well as other salient features of the US economy. The calibrated model is capable of replicating the stylized facts quite closely and sheds new light as to how surplus is generated from merger and how the gains are split. I find that merger activity generates potentially large long-run gains in aggregate performance, measuring about 30% in aggregate productivity and output, and about 11% in welfare.

Suggested Citation

  • Joel David, 2012. "The Aggregate Implications of Mergers and Acquisitions," 2012 Meeting Papers 1178, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1178
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    References listed on IDEAS

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    Cited by:

    1. Stiebale, Joel & Vencappa, Dev, 2018. "Acquisitions, markups, efficiency, and product quality: Evidence from India," Journal of International Economics, Elsevier, vol. 112(C), pages 70-87.
    2. Andrea Caggese & Ander Pérez-Orive, 2017. "Capital Misallocation and Secular Stagnation," Finance and Economics Discussion Series 2017-009, Board of Governors of the Federal Reserve System (U.S.).
    3. Joel Stiebale & Nicole Wößner, 2020. "M&As, Investment and Financing Constraints," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 27(1), pages 49-92, January.
    4. Veronica Rappoport & Catherine Thomas & Bernard Salanie & Maria Guadalupe, 2013. "The Perfect Match: Assortative Matching in International Acquisitions," 2013 Meeting Papers 1000, Society for Economic Dynamics.
    5. Serguey Braguinsky & Atsushi Ohyama & Tetsuji Okazaki & Chad Syverson, 2015. "Acquisitions, Productivity, and Profitability: Evidence from the Japanese Cotton Spinning Industry," American Economic Review, American Economic Association, vol. 105(7), pages 2086-2119, July.
    6. Stiebale, Joel, 2016. "Cross-border M&As and innovative activity of acquiring and target firms," Journal of International Economics, Elsevier, vol. 99(C), pages 1-15.
    7. Theodosios Dimopoulos & Stefano Sacchetto, 2014. "Merger Activity in Industry Equilibrium," GSIA Working Papers 2012-E47, Carnegie Mellon University, Tepper School of Business.
    8. Xu, Jianhuan, 2017. "Growing through the merger and acquisition," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 54-74.
    9. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2018. "Growth through acquisition of innovations," Working Papers w0247, New Economic School (NES).
    10. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    11. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2019. "Growth through acquisition of innovations," Working Papers w0247, Center for Economic and Financial Research (CEFIR).

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