The Microeconomic Consequences of Corporate Mergers

Abstract

The objective of this study is to examine empirically the validity of a series of allegations regarding the economic effects of mergers. These alleged effects of mergers can be classified into two groups: The first is concerned with the possible impairment of market competition (the market level); the second deals with the impact of mergers on the firms concerned and on their stockholders (the firm level). The current study is restricted to the latter (firm level) effects. Despite the impressive number of mergers in the United States, the empirical evidence regarding their effects is still scanty. The few microeconomic studies that have been published are mainly concerned with the profitability of mergers, and the conclusions reached are often contradictory.' The current study examines, in addition to the profitability of mergers, such aspects as risk, growth, capital structure, income tax savings, earnings per share, etc. The conclusion is that the long-run profitability of acquiring firms is probably somewhat higher than that of comparable nonmerging firms. The evidence is largely negative, however, with respect to other alleged effects of mergers; the characteristics of merging firms are hardly distinguishable from those of comparable nonmerging firms.

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