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M&A and Competition

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Manchester Grand Hyatt, Seaport G
Hosted By: American Finance Association
  • Chair: Pavel Savor, DePaul University

Corporate Rivalry and Return Comovement

Eric de Bodt
,
University of Lille
B. Espen Eckbo
,
Dartmouth College
Richard Roll
,
California Institute of Technology

Abstract

Industrial organization theory suggests that rivals react to industry-specific competition shocks in primarily one of two ways: by increasing product differentiation to capture additional revenue or lowering product differentiation to reduce costs. Since rival reactions affect intra-industry cash-flow correlations, they also cause changes in idiosyncratic (extra-factor, within-industry) return comovement. Consistent with cost-reducing rival reactions, we find that competition shocks increase idiosyncratic comovement, which in turn is associated with higher levels of firm-specific cost-efficiency measures. The higher post-shock bi-firm rival comovement also increases the likelihood that the two firms will merge

Beyond the Target: M&A Decisions and Rival Ownership

Miguel Anton
,
University of Navarra
Jose Azar
,
University of Navarra
Mireia Gine
,
University of Navarra and University of Pennsylvania
Luca Xianran Lin
,
University of Navarra

Abstract

Diversified acquirer shareholders can profit from value-destroying acquisitions not only through their target stakes, but also through their stakes in non-merging rival firms. We find that announcement losses are largely mitigated for the average acquirer shareholder when accounting for wealth effects on their rival stakes. Close to a third of acquirer shareholders benefit from bad acquisitions at the industry portfolio level. Rival ownership by acquirer shareholders is negatively associated with acquirer CAR and deal synergies, while positively associated with the probability of bad deal completion. These results help explain why shareholders often lack incentives to monitor against value-destroying acquisitions.

Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry

Alice Bonaime
,
University of Arizona
Ye Wang
,
University of Arizona

Abstract

Using novel data from the pharmaceutical industry, we study the impact of mergers on product prices and innovation. Product prices increase approximately 5% more within acquiring versus matched non-acquiring firms. These price increases are more pronounced for horizontal mergers and for acquisitions of large and publicly traded targets, i.e., deals resulting in greater market power consolidation. Consistent with causal identification of enhanced market power around mergers, price increases are significantly greater within drug classes with acquirer/target overlap and absent for drugs already shielded from competition through patents and exclusivity rights. We find no evidence of mergers facilitating or incentivizing innovation—a potential tradeoff to higher product prices.
Discussant(s)
Gerard Hoberg
,
University of Southern California
Andrew Koch
,
University of Pittsburgh
Albert Sheen
,
University of Oregon
JEL Classifications
  • G3 - Corporate Finance and Governance