No abstract

This study seeks to understand “how” economic shocks drive industry merger activity. We test whether economic shocks from deregulation and technological change drive industry merger activity by increasing industry competition, controlling for the effect of valuations. We find that these shocks drive merger activity through three channels related to industry competition; deregulation drives merger activity by increasing entry and cash flow volatility; technological change drives merger activity by increasing entry and inter-firm dispersion in the quality of production technology. These findings underscore the role of the competitive mechanism in how managers reallocate assets via mergers and support the view that the industry-level clustering of merger activity is an efficiency-driven restructuring response to increased competition.

We use data from the past 30 years of takeover activity in the U.S. banking industry to test competing neoclassical and misvaluation merger theories. Test results are consistent with evidence in the literature that merger activity is significantly related to both structural industry change and stock price misvaluation. Our primary contribution is to show that changes in misvaluation reflect a rise in industry-wide risk taking and that increases in risk originate from changes in industry structure due to deregulation. A measure of bank risk taking subsumes the power of stock price misvaluation to explain subsequent merger activity.

In this article we examine the U.S. telecommunications industry during a period of rapid deregulation to determine the effects of a deregulatory shock on industry competition and merger activity. We show that merger activity exhibits a clear wave-like pattern, regardless of the listing status of the participants. Increased competition and IPO activity following deregulation increased cash-flow volatility and probability of exit while the introduction of new technology increased dispersion of economic efficiency across the industry. These changes resulted in a significant increase in merger activity. Competition also played an important role in shaping "who buys whom?" JEL Classification: G34, G38