The Importance of Industry Links in Merger Waves

Abstract

We represent the economy as a network of industries connected through customer and supplier trade flows. Using this network topology, we find that stronger product market connections lead to a greater incidence of cross‐industry mergers. Furthermore, mergers propagate in waves across the network through customer‐supplier links. Merger activity transmits to close industries quickly and to distant industries with a delay. Finally, economy‐wide merger waves are driven by merger activity in industries that are centrally located in the product market network. Overall, we show that the network of real economic transactions helps to explain the formation and propagation of merger waves.

Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions

“…Our findings suggest that in-wave acquirers have lower abnormal returns over the years immediately following the merger. We also compare the quality of internal and 17 As in Ahern and Harford (2011), we modify the Make table to include employee compensation as a commodity that is solely produced by the employee compensation industry. This table reestimates our tests for the subset of merger waves where: (i) the target company industry is undergoing a merger wave but the acquiring company industry is not, and (ii) the acquiring and target companies are not connected via the supply chain.…”

“…Our merger wave measures do not account for such a possibility. To do so, we construct measures of industry dependence following Ahern (2012) and Ahern and Harford (2011).…”

Multi-Business Firms, Knowledge Flows and Intra-Network Open Innovations

“…The portfolio of hierarchically organized business units in a diversified firm replaces an equivalent collection of independently acting firms in different external markets, such as the capital market (Duchin and Sosyura 2013), the labour market (Neffke and Henning 2013) or the technology market (Breschi et al 2003). In other words, the economy, as a network of industries connected through decentralized external markets, is partially substituted by the multi-business firm as a network of business units connected through centralized internal markets (Ahern and Harford 2014).…”

Impact of industry characteristics on the method of payment in mergers

“…Lambrecht (2004), Ahern and Harford (2010), Bernile, Lyandres, and Zhdanov (2012) and Hackbarth and Miao (2011) predict that merger activity is related to the degree of industry concentration and to industry demand conditions. Gorton, Kahl, and Rosen (2009) predict that the type of firms merging and the profitability of acquisitions depend on the distributions of firm sizes within an industry.…”

“…Yet, merger activity is influenced by industry and economic conditions. In particular, merger activity is clustered among industries, and tends to be associated with industryspecific shocks (Ahern & Harford, 2010;Andrade & Stafford, 2004;Andrade, Mitchell, & Stafford, 2001;Betton, Eckbo, & Thorburn, 2008;Harford, 2005;Mitchell & Mulherin, 1996;Mulherin & Boone, 2000;Powell & Yawson, 2005). Mitchell and Mulherin (1996) suggest that research on mergers would benefit from considering the "joint effect of macroeconomic and industry-level factors."…”