The Impact of Merger Legislation on Bank Mergers

Abstract:

We study the impact on bank merger activity of the strengthening in merger control legislation introduced in Europe between 1989 and 2004. We find that strengthening merger control increases the abnormal returns on bank target stocks in the days around the merger announcement by 7 percentage points relative to before the new legislation. We discuss several potential explanations for this effect of the change in legislation by studying changes in merger characteristics. We find a weak increase in the pre-merger profitability of target banks, a decrease in the size of acquirers and a decrease in the share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rival banks in the country appear unaffected. The evidence is consistent with legislation changes leading to transactions being undertaken that are more profitable and more pro-competitive.

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SFB530.pdf

Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics

Abstract:

Theoretical and empirical work on export dynamics has generally assumed constant marginal production cost and therefore ignored domestic product market conditions. However, recent studies have documented a negative correlation between fi…rms'’ domestic and export sales growth, suggesting that fi…rms can be capacity constrained in the short run and face increasing marginal production cost. This paper develops and estimates a dynamic model of export behavior incorporating short-term capacity constraints and endogenous capital investment. Consistent with the empirical evidence, the model features fi…rms'’ sales substitutions across markets in the short term, and generates time-varying transition paths of fi…rm responses through …rms’capital adjustments over time.

The model is fi…t to a panel of plant-level data for Colombian manufacturing industries and used to simulate how …firm responses transition following an exchange-rate devaluation. The results indicate that incorporating capital adjustment costs is quantitatively important, as shown by the length of the transition period, and the di¤erence between the short-run and long-run exchange rate elasticity of exports. Firms’' expecation on the permanence of the policy changes also matters.

JEL Classification: F12, L11, F14

Keywords: International trade; heterogeneous fi…rms; capacity constraints; capitaladjustment costs; …firm dynamics; fi…rm panel data.

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529.pdf

Merger Policy in a Quantitative Model of International Trade

Abstract:

In a two-country international trade model with oligopolistic competition, we study the conditions on market structure and trade costs under which a merger policy designed to benefit domestic consumers is too tough or too lenient from the viewpoint of the foreign country. Calibrating the model to match industry-level data in the U.S. and Canada, we show that at present levels of trade costs merger policy is too tough in the vast majority of sectors. We also quantify the resulting externalities and study the impact of different regimes of coordinating merger policies at varying levels of trade costs.

JEL classification: F12, F13, L13, L44
Keywords: Mergers and Acquisitions, Merger Policy, Trade Policy, Oligopoly, International Trade

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519SFB.pdf

Intermediation in Networks

Abstract:

I study intermediation in networked markets using a stochastic model of multilateral bargaining in which traders compete on different routes through the network. I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the impact of network structure on payoffs. There is never too little trade but there may be an inefficiency through too much trade in states where delay would be efficient. With homogenous trade surplus the payoffs for players that are not essential to a trade opportunity go to zero as trade frictions vanish.

JEL Classification: C73, C78, L14

Keywords: bargaining, financial networks, intermediation, matching, middlemen, networks, over-the-counter markets, stochastic games

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471.pdf

INSTITUTIONS AND THE PRESERVATION OF CULTURAL TRAITS

Abstract:

We offer a novel explanation for why some immigrant groups and minorities have persistent, distinctive cultural traits – the presence of a rigid institution. Such an institution is necessary for communities to not fully assimilate to the mainstream society. We distinguish between different types of institutions, such as churches, foreign-language media or ethnic business associations and ask what level of cultural distinction these institutions prefer. Any type of institution can have incentives to be extreme and select maximal cultural distinction from the mainstream society. If institutions choose positive cultural distinction, without being extremist, then a decrease in discrimination leads to reduced assimilation.

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470.pdf

Anticompetitive Vertical Merger Waves

Abstract:

We develop a model of vertical merger waves leading to input foreclosure. When all upstream firms become vertically integrated, the input price can increase substantially above marginal cost despite Bertrand competition in the input market. Input foreclosure is easiest to sustain when upstream market shares are the most asymmetric (monopoly-like equilibria) or the most symmetric (collusive-like equilibria). In addition, these equilibria are more likely when (i) mergers generate strong synergies; (ii) price discrimination in the input market is not allowed; (iii) contracts are public; whereas (iv) the impact of upstream and downstream industry concentration is ambiguous.

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440.pdf

Competition with Exclusive Contracts in Vertically Related Markets: An Equilibrium Non-Existence Result

Abstract:

I develop a model in the spirit of Ordover, Saloner, and Salop (1990), in which two upstream firms compete to supply a homogeneous input to two downstream firms, who compete in prices with differentiated products in a downstream market. Upstream firms are allowed to offer exclusive two-part tariff contracts to the downstream firms. I show that, under very general conditions, this game does not have a subgame-perfect equilibrium in pure strategies. The intuition is that variable parts in such an equilibrium would have to be pairwise-proof. But when variable parts are pairwise-proof, downstream competitive externalities are not internalized, and there exists a profitable deviation. I contrast this non-existence result with earlier papers that found equilibria in similar models.

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439.pdf

For-Profit Search Platforms

Abstract:

We consider optimal pricing by a profit-maximizing platform running a dynamic search and matching market. Buyers and sellers enter in cohorts over time, meet and bargain under private information. The optimal centralized mechanism, which involves posting a bid-ask spread, can be decentralized through participation fees charged by the intermediary to both sides. The sum of buyers’ and sellers’ fees equals the sum of inverse hazard rates of the marginal types and their ratio equals the ratio of buyers’ and sellers’ bargaining weights. We also show that a monopolistic intermediary in a search market  ay be welfare enhancing.

Keywords: Dynamic random matching, two-sided private information, intermediaries

JEL Codes: D82, D83

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436.pdf

Assessing the Performance of Simple Contracts Empirically: The Case of Percentage Fees

Abstract:

This paper estimates the cost of using simple percentage fees rather than the broker optimal Bayesian mechanism, using data for real estate transactions in Boston in the mid-1990s. This counterfactual analysis shows that intermediaries using the best percentage fee mechanisms with fees ranging from 5.4% to 7.4% achieve 85% or more of the maximum profit. With the empirically observed 6% fees intermediaries achieve at least 83% of the maximum profit and with an optimally structured linear fee, they achieve 98% or more of the maximum profit.

Keywords: brokers, simple mechanisms, percentage fees, real estate brokerage.

JEL-Classification: C72, C78, L13

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435.pdf

Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation

Abstract:

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

Keywords: brokers, applied mechanism design, linear commission fees, optimal indirect mechanisms, auction houses.

JEL-Classification: C72, C78, L13

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434.pdf

Breaking Up a Research Consortium

Abstract:

Inter-firm R&D collaborations through contractual arrangements have become increasingly popular, but in many cases they are broken up without any joint discovery. We provide a rationale for the breakup date in R&D collaboration agreements. More specifically, we consider a research consortium initiated by a firm A with a firm B. B has private information about whether it is committed to the project or a free-rider. We show that under fairly general conditions, a breakup date in the contract is a (secondbest) optimal screening device for firm A to screen out free-riders. With the additional constraint of renegotiation proofness, A can only partially screen out free-riders: entry by some free-riders makes sure that A does not have an incentive to renegotiate the contract ex post. We also propose empirical strategies for identifying the three likely causes of a breakup date: adverse selection, moral hazard, and project non-viability.

Keywords: Optimal R&D contracts, adverse selection, breakup date, R&D collaboration

JEL-Classification: C72, D82, L20

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433.pdf

Identification and Estimation of Intra-Firm and Industry Competition via Ownership Change

Abstract:

This paper proposes and empirically implements a framework for analyzing industry competition and the degree of joint profit maximization of merging firms in differentiated product industries. Using pre- and post-merger industry data, I am able to separate merging firms' intra-organizational pricing considerations from industry pricing considerations. The insights of the paper shed light on a long-standing debate in the theoretical literature about the consequences of organizational integration. Moreover, I propose a novel approach to directly estimate industry conduct that relies on ownership changes and input price variation. I apply my framework using data from the ready-to-eat cereal industry, covering the 1993 Post-Nabisco merger. My results show an increasing degree of joint profit maximization of the merged entities over the first two years after the merger, eventually leading to almost full maximization of joint profits. I find that between 14.3 and 25.6 percent of industry markups can be attributed to cooperative industry behavior, while the remaining markup is due to product differentiation of multi-product firms.

Keywords: Identification of Market Structure, Post-merger Internalization of Profits,

Conduct Estimation, Ex-post Merger Evaluation, Estimation of Synergies

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409.pdf

Globalization and Multiproduct Firms

Abstract:

We present an international trade model with multiproduct firms. Firms are heterogeneously endowed with two types of capabilities that jointly determine the trade-off within firms between managing a large portfolio of products and producing at low marginal cost. The model can explain many of the documented cross-sectional correlations in firm performance measures, including why larger firms are more productive and more diversified, and yet more diversified firms trade at a discount. Globalization is shown to induce heterogeneous responses across firms in terms of scope and productivity, some of which are consistent with existing empirical work, while others are potentially testable.

Keywords: multiproduct firms, trade liberalization, diversification discount, firm heterogeneity, productivity

JEL Classification: F12, F15

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408.pdf

The Timing of Climate Agreements under Multiple Externalities

Abstract:

We study the potential of cooperation in global emission abatements with multiple externalities. Using a two-country model without side-payments, we identify the strategic effects under different timing regimes of cooperation. We obtain a positive complementarity effect of long-term cooperation in abatement on R&D levels that boosts potential benefit of long-term cooperation and a redistributive effect that destabilizes long-term cooperation when countries are asymmetric. We show that whether and what type of cooperation is sustainable, depends crucially on the kind rather than on the magnitude of asymmetries.

Keywords: climate treaty; timing of cooperation; multiple externalities; long-term commitment

JEL classification: D62, F53, H23, Q55

November 2011

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366.pdf

How Effective is European Merger Control?

Abstract:

This paper applies an intuitive approach based on stock market data to a unique dataset of large concentrations during the period 1990-2002 to assess the effectiveness of European merger control. The basic idea is to relate announcement and decision abnormal returns. Under a set of four maintained assumptions, merger control might be interpreted to be effective if rents accruing due to the increased market power observed around the merger announcement are reversed by the antitrust decision, i.e. if there is a negative relation between announcement and decision abnormal returns. To clearly identify the events’ competitive effects, we explicitly control for the market expectation about the outcome of the merger control procedure and run several robustness checks to assess the role of our maintained assumptions. We find that only outright prohibitions completely reverse the rents measured around a merger’s announcement. On average, remedies seem to be only partially capable of reverting announcement abnormal returns. Yet they seem to be more effective when applied during the first rather than the second investigation phase and in subsamples where our assumptions are more likely to hold. Moreover, the European Commission appears to learn over time.

Keywords: Merger Control, Remedies, European Commission, Event Studies
JEL Classification: L4, K21, G34, C2, L2

April 2011

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354.pdf

Collusion through Joint R&D: An Empirical Assessment

Abstract:

This paper tests whether upstream  R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors – created through firms being members in several RJVs at the same time – are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

Keywords: Research Joint Ventures, Innovation, Collusion, NCRA

JEL Classification: K21, L24, L44, D22, O32

November 2010

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343.pdf

Two-sided Certification: The market for Rating Agencies

Abstract:

Certifiers contribute to the sound functioning of markets by reducing a symmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

Keywords: Certification, Rating Agencies, Asymmetric Information, Financial Markets.
JEL Classification: G14, G24, L15, D82.

October 2010

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338.pdf

An Empirical Assessment of the 2004 EU Merger Policy Reform

Abstract:

Based on a database of 326 merger cases scrutinized by the European Commission between 1990 and 2007, we evaluate the economic impact of the change in European merger legislation in 2004. We ?rst propose a general framework to assess merger policy effectiveness, which is based on standard oligopoly theory and makes use of stockmarket reactions as an external assessment of the merger and the merger control decision. We then focus on four different dimensions of effectiveness: 1) legal certainty; 2) frequency and determinants of type I and type II errors; 3) rent-reversion achieved by different merger policy tools; and 4) deterrence of anti-competitive mergers. To infer the economic impact of the merger policy reform, we compare the results of our four tests before and after its introduction. Our results suggest that the policy reform seems to have been only a modest improvement of European merger policy.

Keywords: merger control, regulatory reform, EU Commission, event-study

JEL Classification: L4, K21, C13, D78

October 2010

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337.pdf

Market Share Dynamics in a Model with Search and Word-of-Mouth Communication

Abstract:

This paper analyzes price competition in an infinitely repeated duopoly game. In each period, consumers remember the existence and location of their previous supplier. New information is gathered via search or word-of-mouth communication. Market outcomes are history-dependent, and the Markov perfection refinement is used to narrow the set of equilibria. Firms are shown to use mixed pricing strategies in equilibrium. The resulting price dispersion generates non-trivial market share dynamics. The goal of the paper is to characterize these dynamics, and to reveal the driving forces behind them.

Keywords: repeat purchasing, search, customer loyalty, lock-in, mixed pricing

JEL Classification:D43, D83, L11

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301.pdf

Carbon leakage: Grandfathering as an incentive device to avert relocation

Abstract:

Emission allowances are often distributed for free in an early phase of a cap-and-trade scheme (grandfathering) to reduce adverse effects on the profitability of firms. If the grandfathering scheme is phased out over time, firms may nevertheless relocate to countries with a lower carbon price once the competitive disadvantage of their home industry becomes sufficiently high. We show that this is not necessarily the case. A temporary grandfathering policy can be a sufficient instrument to avert relocation in the long run, even if immediate relocation would be profitable in the absence of grandfathering. A necessary condition for this is that the permit price triggers investments in low-carbon technologies or abatement capital.

Keywords: climate policy, emissions trading, grandfathering, leakage, cap-and-trade

JEL Classification: Q55, Q58, L51

Full text in pdf format:

300.pdf

Deterrence in Competition Law

Abstract:

This paper provides a comprehensive discussion of the deterrence properties of a competition policy regime. On the basis of  the economic theory of law enforcement we identify several factors that are likely to affect its degree of deterrence: 1) sanctions and damages; 2) financial and human resources; 3) powers during the investigation; 4) quality of the law; 5) independence; and 6) separation of power. We then discuss how to measure deterrence. We review the literature that use surveys to solicit direct information on changes in the behavior of firms due to the threats posed by the enforcement of antitrust rules, and the literature based on the analysis of hard data. We finally argue that the most  challenging task, both theoretically and empirically, is how to distinguish between “good” deterrence and “bad” deterrence.
 

Keywords: Competition Policy, Law Enforcement, Deterrence

JEL Classification: K21, K42, L4

October 2009

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285.pdf

Measuring the deterrence properties of competition policy: the Competition Policy Indexes

Abstract:

The aim of this paper is to describe in detail a set of newly developed indicators of the quality of competition policy, Competition Policy Indexes, or CPIs. The CPIs measure the deterrence properties of a competition policy in a jurisdiction, where for competition policy we mean the antitrust legislation, including the merger control provisions, and its enforcement. The CPIs incorporate data on how the key features of a competition policy regime score against a benchmark of generally-agreed best practices and summarise them so as to allow cross-country and cross-time comparisons. The  CPIs have been calculated for a sample of 13 OECD jurisdictions over the period 1995-2005.

Keywords: Competition Policy, Indicator, Deterrence, Competition Law

JEL Classification: K21, K42, L40

October 2009

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284.pdf

Competition Policy and Productivity Growth: An Empirical Assessment

Abstract:

This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy asmeasured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

Keywords: Competition Policy, Productivity Growth, Institutions, Deterrence, OECD

JEL Classification: L4, K21, O4, C23

October 2009

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283.pdf

How does entry regulation influence entry into selfemployment and occupational mobility?

Abstract:

We analyze how an entry regulation that imposes a mandatory educational standard affects entry into self-employment and occupational mobility. We exploit the German reunification as a natural experiment and identify regulatory effects by comparing differences between regulated occupations and unregulated occupations in East Germany with the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into selfemployment and occupational mobility after reunification more in regulated occupations in East Germany than in West Germany. Our findings are relevant for transition or emerging economies as well as for mature market economies requiring large structural changes after unforeseen economic shocks.

Keywords: Entry Regulation, Self-Employment, Occupational Mobility

JEL Classification: J24, J62, K20, L11, L51, M13

July 2009

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267.pdf

On the Stability of Research Joint Ventures: Implications for Collusion

Abstract:

Though there is a body of theoretical literature on research joint ventures (RJV) participation facilitating collusion, empirical tests are rare. Even more so, there are few empirical tests on the general theme of collusion. This note tries to fill this gap by assuming a correspondence between the stability of research joint ventures and collusion. By using data from the US Nation Cooperation Research Act, we show that large RJVs in concentrated industries are more stable and hence more suspect to collusion.

Keywords: research joint ventures, product market collusion, empirical test
JEL Classification: L24, L44, L52
March 2008

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240.pdf

The impact of horizontal mergers on rivals: Gains to being left outside a merger

Abstract:

It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, 'future acquisition probability' does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type.

Keywords: rivals, mergers, acquisitions, event-study
JEL Classification: G14, G34, L22, M20
June 2008

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239.pdf

Domestic Rivalry and Export Performance: Theory and Evidence from International Airline Markets

Abstract:

The much-studied relationship between domestic rivalry and export performance consists of those supporting a national-champion rationale, and those supporting a rivalry rationale. While the empirical literature generally supports the positive effects of domestic rivalry, the national-champion rationale actually rests on firmer theoretical ground. We address this inconsistency by providing a theoretical framework that illustrates three paths via which domestic rivalry translates into enhanced international exports. Furthermore, empirical tests on the world airline industry elicit the existence of one particular path - an enhanced firm performance effect - that connects domestic rivalry with improved international exports.

JEL Classification: L52, L40, L93
February 2008

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225.pdf

The Dynamics of Research Joint Ventures: A Panel Data Analysis

Abstract:

The aim of this paper is to test the determinants of Research Joint Ventures’ (RJVs) group dynamics. We look at entry, exit and turbulence in RJVs that have been set up under the US National Cooperative Research Act, which allows for certain antitrust exemptions in order to stimulate firms to cooperate in R&D. Accounting for unobserved project characteristics and controlling for inter-RJV interactions and industry effects, the Tobit panel regressions show the importance of group and time features for an RJV’s evolution. We further identify an average RJV’s long-term equilibrium size and assess its determining factors. Ours is a first attempt to produce robust stylized facts about cooperational short- and long-term dynamics, an important but neglected dimension in research cooperations.

Keywords: research joint ventures, dynamics, panel data
JEL Classification: C23, L24, O32
October 2007

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221.pdf

Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools

Abstract:

Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.

JEL Classification: L40, L49, K21
September 2007

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218.pdf

The Impact of ISO 9000 Diffusion on Trade and FDI: A New Institutional Analysis

Abstract:

The effects of ISO 9000 diffusion on trade and FDI have gone understudied. We employ panel data reported by OECD nations over the 1995-2002 period to estimate the impact of ISO adoptions on country-pair economic relations. We find ISO diffusion to have no effect in developed nations, but to positively pull FDI (i.e., enhancing inward FDI) and positively push trade (i.e., enhancing exports) in developing nations.

Keywords: FDI, trade, transaction costs, institutions
JEL Classification: C51, F23, L31
November 2006

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179.pdf

Bankintermediation bei der Kreditvergabe an junge oder kleine Unternehmen

Abstract:

Loan financing, especially long term bank loan financing, is important for young or small firms in Germany. A large share of all small business lending in Germany originates in public financing programs and cooperative banks, (non-cooperative) private sector credit banks as well as savings banks mediate in the assignment of loans from these programs. Our empirical analyses of this loan type provide insights into the small business loan assignment behavior of the three different bank groups in general. Using various econometric techniques, observation periods and data sources – including detailed data on 6.880 firms – we find three robust, originate results: Not only recently, but already at the beginning of the 1990s credit banks played no substantial, statistically significant role in small business lending. Cooperative and savings banks have, in contrast, a strong, significant positive influence on young, small firms’ loan access. In addition, the loan assignment behavior of the two latter groups is found to be very similar. This is an important result given the ongoing controversial discussion on reforming the German savings bank sector.

Keywords: Kreditvergabeverhalten von Genossenschaftsbanken, Kreditbanken und Sparkassen, Finanzierung junger, kleiner Unternehmen, langfristige Kredite und öffentliche Förderprogramme, Reformierung des deutschen Sparkassensektors
August 2006

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178.pdf

Bailouts in a common market: a strategic approach

Abstract:

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.

Keywords: subsidies, asymmetric oligopoly, exit, European Union
JEL Classification: F13, L13, L52
October 2005

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177.pdf

Effectiveness of bailouts in the EU

Abstract:

Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.

Keywords: State aid, European Union, Discrete-time hazard, Bivariate probit
JEL Classification: K2, G3, L5
October 2006

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176.pdf

Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data

Abstract:

Using a sample of 167 mergers during the period 1990-2002 involving 544 firms either as merging firms or competitors, we contrast a measure of the merger’s profitability based on event studies with one based on accounting data. We find positive and significant correlations between them when using a long window around the announcement date and, for rivals, in case of anticompetitive mergers.

Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
JEL Classification: L4, K21, G34
September 2006

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163.pdf

How Effective is European Merger Control?

Abstract:

This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.

Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
JEL Classification: L4, K21, G34, C2, L2
July 2006

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153.pdf

EU Merger Remedies: A Preliminary Empirical Assessment

Abstract:

Mergers that substantially lessen competition are challenged by antitrust authorities. Instead of blocking anticompetitive transitions straight away, authorities might choose to negotiate with the merging parties and allow the transactions to proceed with modifications that restore or preserve the competition in the involved markets. We study a sample of 167 mergers that were under the European Commission’s scrutiny from 1990 to 2002. We use an event study methodology to identify the potential anticompetitive effects of mergers as well as the remedial provisions on these transactions. Stock market reactions around the day of the merger’s announcement provide information on the first question, whereas the stock market reactions around the commission’s final decision day convey information about the outcome of the bargaining process between the authority and the merging parties. We first classify mergers according to their effects on competition and then we develop hypotheses on the effects that remedies are supposed to achieve depending on the merger’s competitive outcome. We isolate several stylized facts. First, we find that remedies were not always appropriately imposed. Second, the market seems to be able to predict remedies’ effectiveness when applied in phase I. Third, the market also seems able to produce a good prior to phase II’s clearances and prohibitions, but not to remedies. This can be due either to a measurement problem or related to the increased merging firms’ bargaining power during the second phase of the merger review.

Keywords: Merger Control, Remedies, European Commission, Event Studies
JEL Classification: L4, K21, C12, C13
January 2006

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81.pdf

Integrating Industrial Organization and International Business to Explain the Cross-National Domestic Airline Merger Phenomenon

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

The domestic airline merger phenomenon of the late 1980s and early 1990s sparked a great deal of Industrial Organization literature; yet, that literature neglected non-US merger activity and the potential for international competitive incentives. Using an International Business perspective to complement a primarily Industrial Organization analysis, I argue that factoring international competitive gains helps explain the domestic airline merger phenomenon. A Cournot model of airline competition illustrates the international incentives behind integrating domestic with international routes and behind acquiring domestic competitors. Further, comprehensive panel data tests also support large domestic networks and actual mergers improving the international competitiveness of airlines.

Keywords: airline-mergers, imperfect-competition, international-determinants
July 2004

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19.pdf