The Economics of Corporate Governance and Mergers

The Economics of Corporate Governance and Mergers

Edited by Klaus Gugler and B. Burcin Yurtoglu

This book provides an insightful view of major issues in the economics of corporate governance (CG) and mergers. It presents a systematic update on the developments in the two fields during the last decade, as well as highlighting the neglected topics in CG research, such as the role of boards, CG and public interest and the relation of CG to mergers. Two important conclusions can be drawn from this book: the first is that corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance; second, there is an important relationship between CG structures and the quality of firm decision-making, one of the most important being the decision to merge or take over another firm.

Chapter 9: Mergers and Efficiency: Theory, Empirical Evidence, and Competition Policy in Japan

Hiroyuki Odagiri

Subjects: business and management, corporate governance, economics and finance, corporate governance

Extract

9. Mergers and efficiency: theory, empirical evidence and competition policy in Japan* Hiroyuki Odagiri Economic consequences of mergers have always been one of the major research interests for Dennis Mueller. When he edited a special issue on mergers in the International Journal of Industrial Organization, he stated that With respect to mergers . . ., disagreement exists over (1) whether mergers are adequately explained by a profits maximization assumption, (2) whether mergers generate net private returns which are positive, zero, or negative, (3) whether mergers generate social returns that go beyond their private returns, and if so what sign do they have, and (4) whether merger policy should stimulate more mergers, or try to curtail them (Mueller, 1989, p. 1). Being skeptical of the efficiency arguments of mergers, he said that ‘Whether the large number of unprofitable mergers is due to managerial hubris or managerial pursuit of goals other than stockholder welfare, these mergers arise because of the considerable discretion managers have in this area. Policies to reduce the number of efficiency reducing mergers should seek to curb managerial discretion’ (ibid., p. 7). Once he even proposed that ‘A policy for preserving this system without sacrificing economic efficiency would be a flat ban on mergers subject to an efficiencies defense’ (Mueller, 1986, p. 234). Whether or not one agrees with this recommendation, everyone would agree that these issues have recently become even more pertinent as mergers have become commonplace. This applies particularly well in Japan...

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