Austrian Perspectives on Economic Organization
Edited by Nicolai J. Foss and Peter G. Klein
Chapter 9: Do Entrepreneurs Make Predictable Mistakes? Evidence from Corporate Divestitures
1 Peter G. Klein and Sandra K. Klein After a brief lull in the early 1990s, the market for corporate control became increasingly active toward the end of the decade. Both 1996 and 1997 set new records for the number of US merger filings, and 1998, 1999 and 2000 brought high-profile ‘mega-mergers’ in financial services, energy, telecommunications, pharmaceuticals and automobiles. In banking alone, for example, a wave of mergers over the decade has led to widespread industry restructuring and consolidation. While total industry activity continues to expand, the number of US banks and banking organizations both fell by almost 30 per cent between 1988 and 1997 (Berger, Demsetz and Strahan, 1999). Like other business practices that do not conform to textbook models of competition, mergers, acquisitions and financial restructurings have long been viewed with suspicion by some commentators and regulatory authorities. However, the academic literature clearly suggests that corporate restructurings do, on average, create value. Event studies of acquisitions consistently find positive average combined returns to acquirer and target shareholders. As summarized by Jensen (1991, p. 15), ‘the most careful academic research strongly suggests that takeovers - along with leveraged restructurings prompted by the threat of takeover - have generated large gains for shareholders and for the economy as a whole’. These gains, historically about 8 per cent of the combined value of the merging companies, ‘represent gains to economic efficiency, not redistribution between various parties’ (Jensen, 1988, p. 23).2 At the same time, however, several studies have found...
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