ABSTRACT
Investments in mergers and acquisitions frequently consume such large portions of executive time and attention that they should be seen as crucial components of firm behaviour. For example, during 1996 US firms expended no less than $670 billion on mergers and acquisitions, and it is probable that even this amount will have been exceeded during 1997. It is commonly assumed that the only significant economic problem that may arise from mergers is their effect on market power which is usually estimated by their effect on the level of prices. If it is estimated that such an effect will be absent in a particular merger, then the presumption is that this merger will be undertaken in order to generate productive and/or dynamic gains. As a consequence, such a merger will normally be cleared. Many studies, however, have found that merger-active firms do not appear to create superior profitability, productive efficiency or innovativeness in comparison to their own histories and/or to size and industry matched control groups. Sometimes merger-active firms even show relative under-performance in some or all of the respects mentioned. 1 Thus, the welfare losses of mergers and acquisitions may not be captured by their effect on prices but rather by their effect on productive and/or dynamic efficiency.
