When Do Vertical Mergers Create Value?


  • We thank Bill Christie (Editor) and an anonymous referee for many very useful comments on two revisions of this manuscript. We also thank seminar participants at NYU, Binghamton University, and INSEAD for many useful comments, as well as participants at an FMA session 2010 and, in particular, the discussant, Josh Spizman. The usual disclaimer applies. Kedia and Ravid thank the Whitcomb Center at Rutgers Business School. Ravid also thanks the Sanger Foundation for financial support.


This paper studies the market reaction to vertical mergers and explores the many rationales for vertical integration proposed in the industrial organization literature. Abnormal returns for vertical merger announcements are positive until the late 1990s, and turn negative afterward. Acquirers suffer most of the losses. We find support for the most fundamental insight in the industrial organization literature, namely, that vertical mergers generate the greatest value when undertaken in imperfectly competitive markets. We find some evidence to support ideas of asset and site specificity, that is, creating value when market exchange is difficult. We do not find support for information-based or price uncertainty theories.