Eat or Be Eaten: A Theory of Mergers and Firm Size





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    • Gary Gorton is from Yale University and NBER. Matthias Kahl is from the Kenan-Flagler Business School, the University of North Carolina at Chapel Hill. Richard J. Rosen is from the Federal Reserve Bank of Chicago. The views in this paper are those of the authors and may not represent the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. We thank Amit Goyal, Cabray Haines, Shah Hussain, Feifei Li, Catalin Stefanescu, and Yihui Wang for excellent research assistance. Matthias Kahl gratefully acknowledges financial support from the Wachovia Center for Corporate Finance. We would like to thank an anonymous referee and an anonymous associate editor for very helpful comments and suggestions. We are also grateful for comments and suggestions by Andres Almazan, Antonio Bernardo, Sanjai Bhagat, Han Choi, Bhagwan Chowdhry, Michael Fishman, Günter Strobl, S. Viswanathan, and Ivo Welch; seminar participants at the Federal Reserve Bank of Chicago, University of Houston, Purdue University, and the University of Wisconsin-Madison; and conference participants at the AFA 2000 meetings and the Texas Finance Festival 2000. This is a substantially revised version of an early draft that was presented at these conferences. Of course, all remaining errors and shortcomings are solely our responsibility.


We propose a theory of mergers that combines managerial merger motives with an industry-level regime shift that may lead to value-increasing merger opportunities. Anticipation of these merger opportunities can lead to defensive acquisitions, where managers acquire other firms to avoid losing private benefits if their firms are acquired, or “positioning” acquisitions, where firms position themselves as more attractive takeover targets to earn takeover premia. The identity of acquirers and targets and the profitability of acquisitions depend on the distribution of firm sizes within an industry, among other factors. We find empirical support for some unique predictions of our theory.