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When Is One Plus One More Than Two? Theory and Evidence of Merger Motivations
Author(s) -
Chung Chune Young,
Hur SeokKyun,
Liu Chang
Publication year - 2020
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12270
Subject(s) - boom , inefficiency , economics , recession , empirical evidence , stock (firearms) , capital (architecture) , monetary economics , microeconomics , financial economics , macroeconomics , mechanical engineering , history , philosophy , archaeology , epistemology , environmental engineering , engineering
We devise a neoclassical economic model that reveals the underlying motivations for mergers, without resorting to distorted firm decisions or stock market inefficiency. Using empirical analyses to verify the model's predictions, we discover that mergers are more likely in economic booms than in recessions. Furthermore, we assert that a firm with insufficient physical capital is likely a bidder in a merger, whereas a firm with large physical capital is likely a target. Our findings are largely consistent with the waves of mergers during economic booms and the theory on operational synergies.