#08-39
Merger Waves: Theory and Evidence
Jinghua Yan, December 2006
Abstract: This paper presents a model that incorporates product market competition into the standard
neoclassical framework. The model explains why value-maximizing firms conduct mergers
that appear to lower shareholder value. In a Cournot setting, the model demonstrates a
prisoners’ dilemma for merging firms in a merger wave. Consistent with the model’s
implications, the paper empirically documents that horizontal mergers are followed by
substantially worse performance when they occur during waves. Moreover, further
empirical tests show that the empirical relation between performance and merger waves is
independent of the method of payment and increasing in the acquirer’s managerial
ownership. These findings are difficult to reconcile with alternative interpretations from
existing theories.
Keywords:
JEL classifications:
