Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 777: Getting a Better Price: Strategic Behaviour before Changes in Ownership of Corporate Assets

Richard Friberg (), Pehr-Johan Norbäck () and Lars Persson ()
Additional contact information
Richard Friberg: Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: We propose a model of investments prior to corporate ownership changes. We derive conditions under which the selling of a firm triggers overinvestment by both the seller and the buyer prior to the asset transfer. In a setting with Cournot competition, we show that these incentives can drive the consumer prices in a post-acquisition duopoly below those of an ongoing triopoly. Our analysis warns against a mechanical use of pre-merger benchmarks in ex post merger evaluations.

Keywords: Mergers & Acquisitions; Ownership; Auctions; Strategic Investments; Merger Evaluations

JEL-codes: L13; L40; L66

34 pages, November 13, 2008

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