Abstract: We study how agglomeration forces influence post-merger restructuring. We hypothesize and find that geographic overlap of acquirer and target establishments creates the potential for (co)agglomeration benefits that will differ for horizontal and vertical mergers. In vertical mergers, the target establishments are more likely to be kept when the acquirer establishment is located in the same city, indicating that firms benefit from geographically proximate inputs for production. In horizontal mergers, local redundancy increases the likelihood of target establishment closure rather than being kept or sold, consistent with the hypothesis that the acquirer aims to contain local competition through closure rather than sale. Using proxies to capture three dimensions of (co)agglomeration: input sharing, knowledge spillover, and labor pooling, we find that both horizontal and vertical acquirers are more likely to keep target establishments in proximate cities when (co)agglomeration benefits are high. Retained target establishments benefiting the most from agglomeration externalities in horizontal mergers show a significant increase in productivity. In addition to explaining how acquirers restructure the firm post-acquisition, our findings show how agglomeration externalities are reinforced and expanded by establishment-level decisions made following mergers.
Discussant: Gerard Hoberg, University of Southern California
Abstract: We examine the effect of increased healthcare costs on local economic conditions. We use private equity (PE) buyouts of U.S.~hospital systems as a shock to the healthcare costs faced by firms in affected areas. Our primary identification strategy consists of the PE acquisition of a large-scale hospital chain, with hospitals dispersed across various communities in the U.S. We supplement this strategy with broader evidence including all PE buyouts of hospitals over a longer sample period. We provide evidence that PE buyouts of hospital systems result in higher healthcare insurance premiums paid by firms, and such rises in premiums lead to higher business bankruptcies, an increase in business loan volume, slower employment and establishment growth, and reduced innovative output. The results are stronger for areas with firms that are plausibly more exposed to the effects of PE hospital buyouts, such as areas where the PE-acquired hospitals have a greater market share and areas with a greater degree of labor intensity. We additionally provide evidence that increases in healthcare costs result in firms being more vulnerable to the financial crisis, suggesting that the negative economic consequences of rising healthcare costs are due to weakened firm balance sheets which cause firms to be more susceptible to negative economic shocks.
Discussant: Constantine Yannelis, University of Chicago
Abstract: Smart money often trades actively during times of large corporate events. We document in the context of mergers and acquisitions (M&A) that, during the bid negotiation period, institutional investors increase their holdings of acquirers in deals that generate positive value and decrease their holdings in those that generate negative value. The resulting trading profits create a significant gap between the return to the acquiring firm and the return to these investors, and this gap renders firm return a misleading measure of investors’ incentives in pursuing mergers. On average, institutional investors earn 2.4% from M&A while the return to acquirers is only -0.9%. In deals that deliver volatile returns to acquiring firms, the gap increases to 6.3%. We further show how the trading motive impacts the ex-ante holdings of institutional investors and how the trading decision and the resulting gap are impacted by the investors’ ability to vote on the deals as well as other deal characteristics such as merger size, stock liquidity, initial holdings, and the institutional investors’ trading skills. Our study highlights that the group of investors who have influence over corporate actions do not necessarily bear the full consequences of such events, and therefore accounting for the dynamics of shareholder composition is critical in measuring investors’ incentives correctly.
Abstract: Antitrust laws mandate regulatory review of mergers and acquisitions (M&A) when the book value of acquired assets exceeds a specified threshold. However, these policies overlook the fact that accounting standards do not allow firms to recognize most intangible capital as assets. We show this omission leads to thousands of acquisitions of intangible capital-intensive firms going unreported to regulators. Acquirers in unreported deals achieve higher equity values and price markups, especially when consolidating overlapping product markets. Unreported deals also accrue greater technological rents to acquirers by consolidating scientifically important patents and breakthrough technologies. We also show unreported deals in pharmaceutical markets are over three times more likely to consolidate overlapping drug projects and acquirers are over three times as likely to terminate these overlapping projects. We find that this encourages subsequent development of copycat drugs at the expense of novel projects. Our results suggest the growth of intangible assets may exacerbate market power through unreported consolidation of the sectors most concerning for consumers.
Discussant: David De Angelis, University of Houston
