Economic Behavior in Institutional Environments: The Corporate Merger Wave of the 1980s

Abstract

Over the last 100 years, the United States has experienced four waves of corporate merger activity. The first occurred at the turn of the century, then again in the 1920s, the 1960s, and the 1980s. Most research on merger waves has focused on individual mergers within a wave. Our research focuses on the wave itself. We develop a theoretical model that centers on the actors who promote the mergers and on those changes in the political and economic environments that provide the resources these actors need to act. Specifically, we argue that a permissive state combined with increased access to capital market funds encourages fringe players to initiate the innovations that enable them to execute mergers. Merger waves occur when these actors become increasingly successful and their innovations are imitated throughout the business community. We provide empirical support for the model using data from the 1980's merger wave. Article: Despite the general upward trend in the number of mergers following World War II (Reid 1968; Mueller 1992), over 50 percent of all merger activity in the United States in the last 100 years has taken place during one of four merger waves 1 These four merger waves occurred at the turn of the century, in the 1920s, the 1960s, and the 1980s (see Figure 1), and they have received considerable public and scholarly attention. Most of the research, however, has been limited to analyzing the behavior of individual firms: In what ways do participating firms differ from nonparticipating firms (Davis and Stout 1992; Haunschild 1993)? Was a merger profitable for the firm and its investors (Dewing 1921; Ravenscraft and Scherer 1987)? We take an entirely different approach. We are interested in the merger wave itself. Our question is: Why, at certain times in our economic history, does the number of mergers increase and then decrease so dramatically? We focus primarily on the actors who promoted the mergers and on the changes in the political and the economic environments that provide the resources these actors needed to act. PREVIOUS LITERATURE Most economists start with the assumption that mergers enhance efficiency (Manne 1965; Mandelker 1974; for an exception see Scherer 1988). Efficient market analysis has argued that mergers reduce the divergence between actual market value and the realizable worth of the corporate assets (Jensen 1984). When an outsider acquires a firm run by an "inefficient" management and disciplines, monitors, or replaces management, the acquiring firm is expected to realize a profit when its stock increases to reflect the improved situation. Contrary to the prediction of efficient market analysis, it is the target firms' stockholders, not the acquiring firms' stockholders, who benefit from higher stock prices (Malatesta 1983; Magenheim and Mueller 1988). In addition, studies have shown that mergers have a negative impact on acquiring firms' profitability (Mueller 1985; Ravenscraft and Scherer 1987). DuBoff and Herman (1989) suggested it is the actors promoting and executing the ...

Organizational Environments in Flux: The Impact of Regulatory Punctuations on Organizational Domains, CEO Succession, and Performance

“…Later in history, the Celler-Kefauver Act of 1950, which discouraged merger among firms in the same industry, caused firms to grow through crossindustry acquisition (Fligstein 1990). Finally, Stearns and Allan (1996) argued that each of the four waves of mergers in the 20th century followed a relaxation in antitrust enforcement.…”

Vive La Résistance: Competing Logics and the Consolidation of U.S. Community Banking

“…Existing work in this area (e.g., Carroll & Swaminathan, 2000) focuses on long-term industry transitions, but our focus on a shorter time frame of dramatic consolidation (cf. Stearns & Allan, 1996) and our finegrained, community-level data allowed us to uncover the possibility that institutional logics rooted in geographical difference (Lounsbury, 2007;Marquis, 2003;Marquis, Glynn, & Davis, 2007) underlie some market activities and shape the ecological mix of organizations. Our paper contributes to the understanding of resistance by highlighting the institutional contingency of community resistance to regulation-driven consolidation.…”

Prestigious stock exchanges: A network analysis of international financial centers

“…For instance, in a study of international trade patterns, outward ties would be captured by the flows of exports to different countries, and a pattern of increasing exports could signify increasing global influence. In our study of dominance in 5 Examples of social network applications to economics and finance are Smith and White (1992), Brewster Stearns and Allan (1996), Mizruchi and Brewster Stearns (2001), Sorenson and Stuart (2001), Uzzi and Gillespie (2002), Mizruchi (2004), Mizruchi and Davis (2004), Byrd and Mizruchi (2005), Mizruchi and Bey (2005), Brewster Stearns and Mizruchi (2005), Mizruchi, Brewster Stearns, and Marquis (2006), Uzzi (2007), and Neuman, Davis, and Mizruchi (2008). 6 A useful reference textbook on methods and applications in social network analysis is Wasserman and Faust (1994).…”