Competition, Monopoly and Corporate Governance

Competition, Monopoly and Corporate Governance

Essays in Honour of Keith Cowling

Edited by Michael Waterson

Competition, Monopoly and Corporate Governance covers three broad themes, each associated with a particular strand of Keith Cowling’s own writings in industrial economics and each represented by four specially commissioned papers.

Chapter 9: The Finance Literature on Mergers: A Critical Survey

Dennis C. Mueller

Subjects: economics and finance, competition policy, corporate governance, industrial economics


9. The finance literature on mergers: a critical survey1 Dennis C. Mueller Among the many important pieces of research by Keith Cowling is a coauthored book of case studies of UK mergers (Cowling et al., 1979). In that book Cowling and associates established that mergers and acquisitions (hereafter M&As)2 can not only result in increases in efficiency and market power, they can also lead to less efficient enterprises. M&As that fall into the first two categories are consistent with the premise that managers maximise profits or shareholder wealth. M&As falling into the third category must be explained by theories that posit other managerial goals than profits, for example firm growth, or quasi-irrational behaviour as might occur because managers are overcome by hubris. From the point of view of the theory of the firm, the important question about M&As is whether they are best explained by a hypothesis from the third category, or by one that presumes profits maximisation. If most M&As are consistent with profits maximisation, then corporate governance structures can be assumed to align shareholder and managerial interests. If, on the other hand, a large fraction do not increase shareholder wealth, corporate governance structures must fail to bring about such an alignment. To measure the social value of M&As, one must also distinguish between the first two sets of hypotheses. Only M&As that increase efficiency, broadly defined, have a positive impact on social...

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