Horizontal Mergers, Investments and Industry Evolution

Do horizontal mergers shape the way an industry evolves? I answer this question by investigating the non-merging rivals’ investments. Based on the stylized fact that the rivals’ performance on average declines in the three years following horizontal mergers, I find the rivals become more cost efficient. Specifically, their R&D, PP&E, and labor investments increase in the segments close to the merger’s industry. These segments appear to have higher Tobin’s Q. Firms with greater R&D increases experience more reductions in the cost of goods sold, SG&A, and higher asset turnovers. The investment allocations are more pronounced among the innovative rivals, the neck-and-neck rivals, and the unconstrained rivals. Overall, this paper helps us better understand how firms deal with competitive pressure through internal capital markets.