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Increasing Market Share as a Rationale for Corporate Acquisitions
Author(s) -
Ghosh Aloke
Publication year - 2004
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.0306-686x.2004.0006.x
Subject(s) - market share analysis , market share , market power , profitability index , business , shareholder , stock market , market value , shareholder value , factor market , market microstructure , monetary economics , economics , microeconomics , finance , corporate governance , order (exchange) , paleontology , horse , biology , monopoly
This study examines the relative importance of market share in acquisitions because anecdotal evidence and economic theory suggest that merging firms benefit from larger market share. Firms might focus on market share to improve shareholder value through improved efficiency, which benefits consumers. Alternatively, higher market share could generate greater market power, which adversely affects consumers. I find that market share of merging firms increases by more than 30%, relative to the pre‐acquisition level, and the increase is even larger after I account for industry changes. Abnormal returns are positively correlated with changes in market share around acquisitions, but not with changes in industry concentration, which suggests stock market's expectation of future benefits from efficiency rather than market power. More directly, I find that merging firms’ long‐run profitability increases with market share, and the increase in profitability primarily results from better asset management.