00-006
INVESTIGATING THE ECONOMIC ROLE OF MERGERS
Gregor Andrade and Erik Stafford
What is the economic role of mergers? We investigate this issue by performing a comparative
study of mergers and other forms of corporate investment, at the industry and firm levels. In our
framework, merger activity is motivated by both firm- and industry-level forces that can generally
be described as either "expansionary" or "contractionary." We find strong support, at the industry
and the firm level, for the existence of both components of merger activity, consistent with a dual
economic role for mergers. We find that industry capacity utilization has significant and opposite
effects on merger and non-merger investment, particularly during the 1970s and 1980s. During
that period, excess capacity drives industry consolidation through merger, while peak capacity
utilization induces industry expansion through non-merger investment. This suggests that one
mechanism through which mergers enable industry restructuring is by inducing exit in times of
industry-wide excess capacity. This phenomenon is reversed in the 1990s when merger intensity
is highest in industries with strong growth prospects, high profitability, and near capacity.
Moreover, at the firm-level, we find that both merger and non-merger investment are positively
related to the Tobin's q of the acquirer. These two latter findings suggest that there is an
important expansionary motivation to mergers as well.
FIN
43 pages
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