The macroeconomic effects of mergers and acquisitions in the United States

What is this research about and why did you do it?

During the 1980s and 1990s, merger waves led to unprecedented corporate consolidation, and prior studies have highlighted that both markups and firm concentration have considerably risen over that timeframe. Although mergers allow firms to unlock synergies, which are productivity-enhancing, they also allow firms to capture market share, thereby reducing competitive pressure in the affected industries. I study the effects of merger activity on aggregate outcomes, and whether mergers can explain the trends mentioned above.

‍

How did you answer this question?

I answer this question using a combination of empirical analysis and structural modeling. Empirically, I study a dataset of over 20,000 merger transactions and provide new stylized facts on acquirers, targets, and their respective competitors. I also provide novel firm-level and aggregate time-series evidence on the effects of merger activity. Theoretically, I develop a firm dynamics model with three key ingredients to provide a structural interpretation to the empirical findings. First, firms are heterogeneous in productivity, which is time-varying, and there is entry and exit of firms. Second, firms charge variable markups. Third, I model the market for corporate control as one in which acquirers compete for targets in competitive auctions.

‍

What did you find?

First, at the firm level, I document that acquirers charge higher markups than both targets and competitors. Both acquirers and targets are larger than their competitors, though acquirers more so than targets. I find strong positive assortative matching along the productivity and markup distributions: productive acquirers with high markups pair with productive, high-markup targets. These patterns suggest that mergers concentrate market power.

‍

Using event studies around merger announcements, I find positive abnormal stock returns for the merging parties and for the competitors of acquirers. Crucially, I document an asymmetry: competitors of acquirers earn positive abnormal returns comparable to those of acquirers, while competitors of targets earn zero returns. This evidence suggests that positive rival returns do not reflect future takeover expectations—if they did, competitors of targets (who resemble targets the most) should also gain. Instead, the results are consistent with market power channels. Supporting this, I also find that acquirers earn higher returns around merger announcements in concentrated industries.

‍

Second, at the aggregate level, I find that merger waves lead to persistent declines in GDP, consumption, and investment, alongside falling labor productivity and moderately rising prices. Third, the calibrated model shows that while mergers bring about synergies, on the net, the anticompetitive effects dominate at the aggregate level. This is because sorting between acquirers and targets tends to create superstar firms, which exploit synergies to raise their markups rather than expand production. In turn, this allows other large firms to also raise their markups, thereby worsening misallocation. Additionally, these large firms crowd out smaller, less productive firms, thus reducing firm entry.

‍

What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

My research highlights that merger activity is a structural driver of corporate concentration. I show that the economic surplus generated by mergers is primarily captured by shareholders through higher markups, rather than passed on to consumers through lower prices. This unequal distribution of the synergy gains acts as a transfer of wealth from consumers to asset holders.

‍

What are the next steps in your agenda?

The next steps in my agenda are to explore the local effects of mergers on labor market power. I plan to extend both the empirical analysis and my structural model to investigate monopsony power and study how market concentration affects wage setting.

‍