Foreign Competition and Acquisitions

Abstract I provide evidence on the impact of foreign competition on firms' propensities to engage in mergers and acquisitions. Using import tariff reductions as exogenous shocks that increase foreign competition, I find that affected firms are more likely to make acquisitions following tariff reductions. Cross-sectional tests show that this association is more pronounced for single segment firms, capital intensive firms, firms with higher profit margins, and firms with better growth opportunities, which suggests that this association is stronger for firms that are affected by increased competition to a greater extent and firms that stand to gain more from acquisitions when faced with increased competition. Moreover, the positive relation between acquisition propensities and tariff cuts is more pronounced for financially unconstrained firms and during times of high capital liquidity, which implies that it is easier for firms with greater access to capital to respond to increases in foreign competition by making acquisitions. Finally, I find some evidence that the acquisitions made in response to tariff decreases are associated with better firm profitability ratios in the following year, indicating that firms respond to increased competition by making acquisitions to improve their operational efficiency.