TOBIN'S Q AND THE ANTI-COMPETITIVE EFFECTS OF LARGE MERGERS.
Item
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Title
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TOBIN'S Q AND THE ANTI-COMPETITIVE EFFECTS OF LARGE MERGERS.
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Identifier
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AAI8302530
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identifier
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8302530
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Creator
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LYN, ESMERALDA ORTIZ-LUIS.
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Contributor
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Stavros Thomadakis
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Date
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1982
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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This paper tests two competing hypotheses regarding the effects of different types of large mergers on the target firms' direct competitors (TDCs): the collusion hypothesis which states that TDCs are expected to benefit when a merger increases the degree of collusion within the industry and thus enables the colluding firms to increase prices; and the efficiency hypothesis which states that TDCs are expected to suffer when a merger takes place to lower production costs and thus results in higher industry output and lower prices.;Three other merger hypotheses are introduced: first, that TDCs are expected to benefit when a merger occurs to remove or reduce excess capacity in the industry; second, that mergers are more likely to occur in industries where there are deficient returns attributable to exit barriers; and third, that the magnitude of the industry effect of mergers depend on the merger type.;The various hypotheses are tested by using Tobin's Q, which is the ratio of the market value of the firm's securities to the replacement cost of its assets. The modern theory of asset valuation and capital markets states that replacement cost should equal capitalized competitive rents on employed capital. Thus, the difference between market value and replacement cost reflects the super-competitive components of profits. The excess of market value over replacement cost also indicates barriers to entry of additional resources into the industry, and market value that falls short of replacement cost indicates restrictions on exit of resources out of the industry.;The paper finds overwhelming support for the hypothesis that mergers are more likely to occur in industries where there are exit barriers. Evidence is also found that mergers typically occur to realize efficiency gains and thus are not expected to enable the TDCs to overcome exit barriers and earn more normal returns. There is also strong evidence that product extension conglomerate mergers have the greatest negative impact on the TDCs. Thus, the overall conclusion is that the efficiency hypothesis explains the motivation behind mergers in general and product extension conglomerate mergers in particular.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
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Program
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Business
