The Market for Mergers and the Boundaries of the Firm




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    • Matthew Rhodes-Kropf is from Columbia University. David T. Robinson is from Duke University.
      We would like to thank Boyan Jovanavic, Charles Jones, Denis Gromb, Gordon Phillips, Stefano Rossi, Tano Santos, and especially S. Viswanathan for useful discussions and input, and workshop participants at Columbia, Duke, 2004 European Finance Association meetings, National Bureau of Economic Research Summer Institute, Federal Reserve Board New York, Stockholm School of Economics, 2005 American Finance Association meetings, University of Maryland, SUNY Buffalo, SUNY Binghamton, Tuck School of Business, 2005 Econometric Society World Congress, William & Mary, Utrecht School of Economics, Texas Christian University, and University of Virginia. We are especially grateful to Jarrad Harford for sharing data with us. Any errors are our own.


We relate the property rights theory of the firm to empirical regularities in the market for mergers and acquisitions. We first show that high market-to-book acquirers typically do not purchase low market-to-book targets. Instead, mergers pair together firms with similar ratios. We then build a continuous-time model of investment and merger activity combining search, scarcity, and asset complementarity to explain this like buys like result. We test the model by relating like-buys-like to search frictions. Search frictions and assortative matching vary inversely, supporting the model over standard explanations.