Working Paper No. 511

Why Mergers Reduce Profits, and Raise Share Prices

Published: March 12, 1999. Revised December 3, 2001.Pages: 38Keywords: Mergers & acquisitions, defensive merger, coalition formation, antitrust policyJEL-codes: G34, L13, C78

Why Mergers Reduce Profits, and Raise Share Prices Sven-Olof Fridolfsson and Johan Stennek


We demonstrate a "preemptive merger mechanism" which may explain the empirical puzzle why mergers reduce profits, and raise share prices. A merger may confer strong negative externalities on the firms outside the merger. If being an "insider" is better than being an "outsider", firms may merge to preempt their partner merging with someone else. Furthermore, the pre-merger value of a merging firm is low, since it reflects the risk of becoming an outsider. These results are derived in a model of endogenous mergers which predicts the conditions under which a merger occurs, when it occurs, and how the surplus is divided.

An Agenda for Europe

Institutional Reform for Innovation and Entrepreneurship

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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