Dynamic Competition, Valuation, and Merger Activity




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    • Both authors are from the Yale School of Management. The authors thank Lauren Cohen, Engelbert Dockner, Alex Edmans, William Goetzmann, Alexander Gümbel, Jonathan Ingersoll, Uday Rajan, Raman Uppal, Ivo Welch, and seminar participants at the University of Toronto, UCSD, and the European Winter Finance Summit for their comments.


We model the interactions between product market competition and investment valuation within a dynamic oligopoly. To our knowledge, the model is the first continuous-time corporate finance model in a multiple firm setting with heterogeneous products. The model is tractable and amenable to estimation. We use it to relate current industry characteristics with firm value and financial decisions. Unlike most corporate finance models, it produces predictions regarding parameter magnitudes as well their signs. Estimates of the model's parameters indicate strong linkages between model-implied and actual values. The paper uses the estimated parameters to predict rivals’ returns near merger announcements.