Working Paper Series
Why Mergers Reduce Profits, and Raise Share Prices
() and Johan Stennek
Abstract: We demonstrate a "preemptive merger mechanism" which may
explain the empirical puzzle why mergers reduce profits, and raise share
prices. A merger may confer strong negative externalilties on the firms
outside the merger. If being an "insider" is better than being an
"outsider", firms may merge to preempt their partner merging with someone
else. Furthermore, the pre-merger value of a merging firm is low, since it
reflects the risk of becoming an outsider. These results are derived in a
model of endogenous mergers which predicts the conditions under which a
merger occurs, when it occurs, and how the surplus is divided.
Keywords: Mergers & acquisitions; definsive merger; coalition formation; antitrust policy; (follow links to similar papers)
JEL-Codes: C78; G34; L13; (follow links to similar papers)
41 pages, March 12, 1999, Revised December 3, 2001
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