The Economics of Corporate Governance and Mergers
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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.
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Chapter 8: A New Retrospective on Mergers

F.M. Scherer


* F.M. Scherer INTRODUCTION For at least three decades Dennis Mueller and I have plowed parallel furrows on a question of considerable importance: the economic consequences of mergers. (At Princeton during the 1960s we worked in another common field: the economics of research and development.) Both of us have been skeptical of the conventional corporate finance wisdom insisting that most mergers are value-enhancing. As I return once more to merger questions after a lapse, I have three itches that still need scratching. First, during the past several years merger activity has revived strongly and bids fair to reach the highest levels ever recorded. It is time to take a new look at the trends. Second, the debate over the success of mergers continues. And third, I have become intrigued about how mergers and their consequences are being treated in business schools. This chapter addresses all three themes, with emphasis on the US experience, although similar developments are visible in Europe. 2 RECENT TRENDS After a brief slump connected with the 2001–02 stock market crash, merger activity has rebounded. Figure 8.1 extends to 2006 a statistical series begun in the first (1970) edition of my industrial organization textbook. It is a series of splices, beginning with Ralph Nelson’s series for 1895–1920 and then extending the series, expressed in billions of constant 1972 dollars, with adjustments for Tobin’s q and data source coverage.1 Thus, more than a century of US merger activity is tracked. One sees clearly the great merger wave...

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