On the motives for merger : an empirical investigation of the long-run performance of merging firms and of acquirers' rivals

This research investigates the efficiency and collusive effects of corporate combinations through an analysis of the three- to five-year post-acquisition performance of merging firms and of rivals of acquiring firms. A system of two simultaneous equations is employed in which long-run changes in the market values of merging firms and of acquirers' rivals are endogenous. Exogenous variables consist of pre-acquisition characteristics of merging firms and of acquirers' industries. The analysis focuses on long-run performance since market structure effects are unlikely to materialize in short-run periods surrounding merger announcement and consummation dates. The sample consists of successful mergers and tender offers involving New York Stock Exchange- and American Stock Exchange-listed firms that were completed from 1973 through 1987. In a separate analysis, the relation between announcement period abnormal stock returns and long-run changes in value is investigated in a test of capital market efficiency. Results suggest the presence of efficiency, as opposed to collusive, effects which are attributable primarily to economies of scale and scope. In addition, these effects emerge after an implementation period of two to three years in length. Finally, capital markets appear efficient with respect to long-run effects of corporate combinations.