Mergers and Technological Change
Working Paper No. 01-W16
Boyan Jovanovic and Peter L. Rousseau
ABSTRACT [article]
We analyze mergers over the past century in a growth model that emphasizes technological change. We explain the positive relation between mergers and stock prices, the positive relation between internal growth of firms and
their acquisitions, and the positive relation of mergers with other measures
of reallocation such as entry and exit. More broadly, mergers help firms to
reallocate assets more smoothly, thereby raising returns to investment and
the growth rate. We also find that merger waves are shorter when technological
change is more dramatic, when the capital of other firms is less costly to
transfer, and when entry and exit are a smooth reallocation mechanism. This
last result underscores that entry and exit on the one hand and mergers on
the other are substitute means of reallocation..