Article | Journal of Finance | June 2008

The Market for Mergers and the Boundaries of the Firm

by Matthew Rhodes-Kropf and David Robinson


We relate the property rights theory of the firm to empirical regularities in the market for mergers and acquisitions. We first show that high market-to-book acquirers typically do not purchase low market-to-book targets. Instead, mergers pair together firms with similar ratios. We then build a continuous-time model of investment and merger activity combining search, scarcity, and asset complementarity to explain this like-buys-like result. We test the model by relating like-buys-like to search frictions. Search frictions and assortative matching vary inversely, supporting the model over standard explanations.

Keywords: Mergers and Acquisitions; Assets; Investment; Property; Mathematical Methods; Boundaries;


Rhodes-Kropf, Matthew, and David Robinson. "The Market for Mergers and the Boundaries of the Firm." Journal of Finance 63, no. 3 (June 2008): 1169–1211.