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

Dennis C. Mueller


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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