Volume 23 Number 3 1997 3

Industrial Structure, Conduct and

Performance: Evidence from Corporate
Combinations
Philip L. Baird,III,Assistant Professor of Finance, A. J. Palumbo School of Business
Administration, Duquesne University, Pittsburgh, PA 15282

1. Introduction

In the literature of industrial organization, debate continues on the relationship

between industrial structure on the one hand and competitive behavior and perform-
ance on the other. This debate is fueled by alternative explanations of the positive
relationship between concentration and profitability observed in early research by
Bain (1951, 1956) and subsequently by others.1 The original explanations were based
on the view that concentration facilitates collusive behavior, and adherents to the
Monopoly Power view naturally attributed the relationship to the existence of mo-
nopoly profits in concentrated industries. The counterargument proposed by Demsetz
(1973) views concentration as the result of active competition by which firms are
motivated to improve efficiency. In the presence of scale economies, larger firms are
more efficient and, hence, more profitable than their smaller rivals. Since their larger
market shares produce higher concentration, a positive relationship between industry
concentration and profitability is observed. In the Efficient Structure (ES) view,
concentration reflects intra-industry efficiency differences; in the Monopoly Power
(MP) view, concentration reflects collusive behavior. Importantly, the empirical
distinction between these theories and, hence, their empirical validity as competing
alternative hypotheses remains unclear.

This research provides new evidence relevant to the debate in an examination of

the industry structure-related determinants of market value gains and losses in
corporate combinations. These determinants reflect the extent to which mergers are
driven by efficiency as opposed to anti-competitive reasons. Since, ceteris paribus,
mergers increase concentration, the results provide indirect, yet meaningful, evidence
of the nature of the relationship between concentration and profitability and of the
empirical validity of MP and ES hypotheses.

This research differs from previous studies of corporate combinations in two

important respects. First, earlier finance-based studies generally have taken a short-
run perspective in focusing on stock returns during the period from announcement
through consummation while ignoring the post-merger period.2 This research takes a
broader view by examining valuation effects from the two years preceding the year
ofmerger through the third year subsequent. A maintained hypothesis holds that value
gains and losses attributable to efficiency and collusive effects are unlikely to
materialize for some time following consummation, perhaps years. The rationale is
that in the presence of asymmetric information, investors are unlikely to respond to
managers' unsubstantiated claims about such benefits for which realization is highly
uncertain.
Volume 23 Number 3 1997 4

Second, previous studies have compared horizontal with non-horizontal mergers

in the search for efficiency versus collusive effects.3 However, the results are
consistent with both MP and ES views and, thus, provide little basis for assessing the
empirical validity of these theories. This research succeeds to a greater extent at
disentangling efficiency from collusive effects by relating the gains and losses of
mergingfirmsand the rivals of acquired firms to industry structure and to merging
firms' competitive positions. Competitive position is measured in terms of profitabil-
ity, growth and size; industry structure is defined in terms of profitability, growth and
concentration. These characteristics are measured prior to the consummation based
on the view that they reflect the competitive threats and opportunities which shape
the motives for merger. As a result, testable hypotheses are developed which provide
a clearer distinction between efficiency and collusion as motives for merger. In
particular, this research tests the hypothesis that firms merge with the intent to reduce
competition in the industry of the acquired firm.

The remainder of the paper is organized as follows. The next section identifies
the broad characteristics of merging firms and their industries most likely to give rise
to collusion as a motive for merger. The data and methodology are described in section
III. Section IV contains a discussion of the results, and section V contains some
concluding remarks.

II. Mergers and Collusion

In the literature of industrial organization, both oligopoly and dominant-firm models

imply that increases in product prices resultingfromhorizontal mergers are positively
related to the level of and merger-induced change in concentration.4 The link between
non-horizontal mergers and collusion relies on a dominant-firm argument. By virtue
of the acquirer's size and other resources (e.g. marketing expertise, productive
capacity, productive efficiency, financial resources), the acquired firm becomes a
dominant player in its industry capable of enforcing a supra-competitive price with
the threat of retaliation against violators. In addition, both horizontal and non-hori-
zontal mergers might have anticompetitive effects through the exercise ofmonopsony
power in common input markets. Since the gainsfromcollusion accrue to other firms
in the industry, the values of merging firms and their rivals should move together
around mergers; i.e. they should behave as complements. Consequently, sources of
gain for merging firms should be sources of gain for theirrivalsas well.

If the motive for merger is to establish a pattern of collusive behavior in the

industry of the acquired firm, then the probability of success and the magnitude of
the gains should be larger where the acquirer is a dominantfirmin its own industry.
This followsfromthe positiverelationshipnoted above between increases in product
prices and changes in concentration. Furthermore, given the incentive to free ride on
any sort of collusive arrangement, the market power and financial resources necessary
to maintain a supra-competitive price suggest that the acquirer should be relatively
large and relatively profitable. Therefore, merger gains should be related positively
to acquirers' size and profitability.

The gainsfromcollusion also are likely to be greater where acquirers' industries

are relatively concentrated. In the Monopoly Power (MP) view, concentration reflects
Volume 23 Number 3 1997 5

collusion (i.e. the absence of competition). Acquirers that are relatively free of
competition in their own industries would seem less likely to merge in response to
competitive pressures and more likely to achieve success in changing the competitive
environment in acquired firms' industries. Consequently, merger gains should be
positively related to concentration in acquiring firms' industries.

Since industries experiencing rapid growth can be characterized generally by the

sort of dynamic instability that is incompatible with collusive behavior, both acquir-
ing- and acquired firms and their industries are likely to be relatively mature. As a
result, merger gains should be related negatively to industry growth. Furthermore,
acquired firms' industries are likely to be relatively unconcentrated; i.e. they should
be competitive. In a mature, competitive environment, growth must come at the
expense of rivals. Under these conditions, where firms expend significant resources
defending their market shares, the gainsfromcollusion should be greater than would
be the case under less competitive circumstances. Since, by the MP view, concentra-
tion reflects collusion (i.e. the absence of competition) the acquired firm's industry
is likely to be relatively unconcentrated (i.e. competitive), and merger gains should
be related negatively to concentration in acquired firms' industries.
To summarize, if the motive for merger is to establish a pattern of collusive
behavior in the industry of the acquired firm, then value gains both for merging firms
and for acquired firms' rivals should be related:
(a) positively to the acquirer's relative size,
(b) positively to the acquirer's profitability,
(c) negatively to the growth of the acquirer's industry,
(d) positively to concentration in the acquirer's industry,
(e) negatively to the growth of the acquired firm's industry, and
(f) negatively to concentration in the acquirer's industry.
III. Data and Methodology
The sample consists of 79 mergers and tender offers completed from 1977 through
1987 involving NYSE/AMEX-listed firms. In order to focus on long-run market
structure effects, the sample was screened for multiple acquisitions from the second
year prior to consummation through the third year subsequent. As mentioned pre-
viously, the focus on long-run performance is based on the view that, in the presence
of asymmetric information, investors are unlikely to respond to managers' unsubstan-
tiated claims about efficiency or other benefits for which realization is highly
uncertain. Consequently, value gains attributable to efficiency or collusion are un-
likely to materialize for some time following consummation, perhaps years. Industry
groups were constructed on the basis of primary 4-digit SIC codes. These codes and
all other data were obtainedfromCOMPUSTAT. Table I provides summary statistics,
and Table II contains correlation coefficients.
 Volume 23 Number 3 1997 6

Statistical tests focus on generalized least squares regression results for the
following equations:5
dEVSi = α0 + α1dIEVStAG + α2dIEVSiAD + α3RSIZEi + α4AGSi +
α5R0CiAG + α 6 GSALE i A G +Α7HiAG+α8ADSi+ α 9 R O C i A D + α 1 0 GSALE i A D +

dIEVSiAD = B 0 β 1 RSIZE i + β2AGSi + β3ROCiAG+ β4GISALEiAG+ β5HiAG+

P6ADSi + β7ROCiAD +β8GISALEiAD+β9HiAD+μi

Table I:
Univariate statistics. N=79 observations
MAX MEAN MEDIAN MM STD
dEVS 1.454 0.044 0.057 -0.804 0.334
dIEVS AG 1.519 0.127 0.058 -0.420 0.342
dIEVSAD 0.780 0.119 0.080 -0.242 0.200
RSIZE 3.777 0.426 0.189 0.007 0.575
AGS 1.000 0.448 0.344 0.002 0.378
ROC A G 0.680 0.279 0.261 0.066 0.120
NROC AG 0.449 0.014 0.016 -0.317 0.109
GSALE AG 117.200 10.303 8.500 -22.800 16.579
GISALEAG 38.400 8.073 7.600 -13.400 9.074
HAG 1.069 0.402 0.361 0.024 0.253
ADS 0.827 0.191 0.100 0.003 0.228
ROCAD 0.593 0.239 0.239 -0.131 0.133
NROCAD 0.487 -0.011 -0.010 -0.401 0.130
GSALEAD 75.591 13.919 10.025 -4.296 13.403
GISALEAD 38.370 11.123 9.766 -6.926 10.266
HAD 0.990 0.343 0.295 0.004 0.246

dEVS represents the change in merging firms' total excess market value (EVS),
and dIEVSAG and dIEVSAD represent the changes in acquiring- and acquired-industry
EVS, respectively. For an individual company, EVS is calculated as the difference
between the market and book values of common equity, normalized by net sales:

MVEit is the market value of common equity of firm i in year t and is computed as
the average annual high-low stock price multiplied by common shares outstanding.
BVEit is the year-end book value of common equity, and SLSit denotes annual net
sales. EVSit is calculated for each acquiring- and acquired firm for each of the two
years preceding the year of merger and the third year subsequent (i.e. for t = -2, -1,
+3 where t =0 is the year of merger).
Volume 23 Number 3 1997 7

Table II:
Correlation Coefficients. Superscripts a, b and c denote statistical significance at the
.01, .05 and .10 levels, respectively
dEVS dIEVSAG dIEVSAD RSIZE AGS ROC AG
AG a
dIEVS 0.38l
dIEVSAD 0.409a 0.301 a
RSIZE 0.147 0.302a 0.333a
b
AGS -0.160 -0.269 -0.274b -0.305a
ROC AG -0.108 -0.313 a
-0.218c -0.165 0.267b
a
NROC AG -0.147 -0.306 -0.224b -0.108 0.219c 0.721 a
GSALE AG -0.102 -0.012 0.047 0.063 -0.094 0.066
GISALEAG -0.164 -0.172 -0.334a -0.326a -0.119 0.166
HAG -0.064 -0.138 -0.279b -0.036 0.286b 0.100
ADS 0.139 0.008 -0.001 0.220c 0.222b 0.010
ROCAD 0.308a 0.109 0.054 -0.075 0.174 0.047
NROCAD 0.224b 0.090 0.052 -0.033 0.127 -0.152
GSALEAD -0.174 0.003 -0.086 -0.039 -0.159 0.095
GISALEAD -0.154 -0.203c -0.267b -0.178 0.013 0.201c
HAD 0.045 -0.032 -0.054 0.051 0.266b -0.130
NROCAG GSALEAG GISALEAG HAG ADS ROC AD
GSALEAG 0.021
GISALEAG -0.095 0.189c
c
HAG 0.200 -0.041 0.100
ADS 0.074 -0.036 -0.174 0.065
ROCAD 0.070 0.146 0.048 0.070 0.162
NROCAD -0.006 0.152 -0.061 0.044 0.137 0.849a
GSALEAD 0.189c 0.093 0.130 0.000 -0.104 -0.026
GISALEAD 0.073 0.116 0.560a 0.048 -0.024 0.064
HAD -0.033 0.026 0.002 0.440a 0.270b 0.136
NROCAD GSALEAD GISALEAD
GSALEAD 0.052
GISALEAD -0.016 0.144
HAD 0.130 -0.123 -0.046 |

The change in merging firms' combined excess market value, dEVSi, is the
difference between the acquirer's post-merger EVS(t=+3) and the pre-merger EVS
of the pair of merging firms. Pre-merger EVS is constructed in two steps. First, the
sales-weighted average EVS for each pair of merging firms is calculated for each
pre-merger year (i.e. for t=-2,-1);then pre-merger EVS is the two-year average of
the combined excess market values obtained in step one. Changes in industry excess
market values, dIEVSAG and dIEVSAD, are calculated in a similar manner on the basis
of sales-weighted average excess market values for 4-digit SIC industries, excluding
the merger firms.

Under perfectly competitive conditions in product, factor and capital markets,

market value equals replacement value. Thus, if book value equals replacement value,
Volume 23 Number 3 1997 8

EVS should be zero. The departure of market value from replacement value reflects
the capitalized value of future excess profits attributable to either differential effi­
ciency or collusion.6 This study focuses on changes in the excess market values of
merging firms and of acquired-firms' rivals for evidence on the market structure-
related effects of corporate combinations. Unlike "ex post" performance measures
derived from accounting data, changes in excess market values are forward-looking
in the sense that they reflect mergers' effects on expectations of future excess profits.

The relative size of an acquisition, RSIZE, is defined as the two-year average (t

=-2,-1) ratio of acquired-firm sales to acquiring-firm sales. RSIZE is an indicator of
the potential magnitude of merger gains. Regardless of the motive, the absolute
magnitude of mergers' effects on EVS should be positively related to RSIZE. In other
words, acquisitions of relatively small firms should have little impact on the acquirer.
If the motive is to reduce competition, then merger gains should be positively related
to RSIZE; i.e. α3 > 0 and β1 > 0.

The size of a merging firm relative to its industry is measured by AGS and ADS.
AGS is the ratio of the acquiring firm's sales to the sales of its largest competitor;
ADS is the ratio of the acquired firm's sales to the sales of its largest competitor. The
collusion hypothesis implies that merger gains should be related positively to both
AGS and ADS: α4 > 0, α8 > 0, β2 > 0,β6> 0.

Profitability is measured by the operating cash flow return on capital, ROC, and
is defined as the ratio ofearnings before interest, taxes and depreciation to total capital.
Total capital is the sum of the book values of long-term debt and owners' equity.
Relative profitability is the difference between the firm's ROC and that of its industry:
NROC=ROC-IROC. Acquiring- and acquired firms' normalized returns on capital
are denoted by NROCAG and NROCAD, respectively. Industry averages are denoted
by IROCAG and IROCAD and are calculated as weighted averages for 4-digit SIC
industries with weights based on total capital. If the motive is to reduce competition,
then merger gains should be related positively to acquirers' profitability: α5 > 0 and
β3 > 0. Acquired firms' profitability (ROCAD) is included as a control variable.
Regressions were run using both unadjusted and normalized profitability measures.

Growth is calculated as the percent change in sales from t =-2 to t =-1 for
acquiring- and acquired firms, GSALEAG and GSALEAD, and their industries, GIS-
ALEAG and GISALEAD. Merger gains should be related negatively to growth rates:
α6 < 0, α10 < 0, β4 < 0, and β8 < 0.

Industry concentration is measured by the entropy, H, which reflects the uncer­

tainty as to which seller will be chosen by a randomly selected buyer.7 It is given by

H
it = Pjk1n pjt t = -2,-1

Ni denotes the number of firms in theithmergingfirm'sindustry including the merging

firm, and pjt denotes market share calculated on the basis of total sales. HAG and HAD
Volume 23 Number 3 1997 9

denote acquiring- and acquired-firm industry entropies, respectively, and are calcu­
lated as two-year averages for t=-2,-l.

As an index of concentration, the entropy has several attractive properties.8 For

example, under pure monopoly, N=l, p j =l, and H=0; there is no uncertainty as to
which seller will be chosen by a randomly selected buyer. In contrast, given N,
uncertainty and entropy are maximized where all market shares are equal; i.e. where
pj=1/N. In this case, H=1n N. Furthermore, H is increasing in N, and any change
toward greater equality of market shares increases H. Since the entropy is an inverse
measure of concentration, merger gains should be related negatively to HAG and
positively to HAD: α7 < 0, α11 > 0, β5 < 0,β9> 0.

The equation for dEVS includes changes in industry excess market values as
explanatory variables in order to control for industry-wide factors that might other­
wise obscure the relationships under consideration. The inclusion of dIEVSAG and
dIEVSAD has little effect on estimated coefficients of the other explanatory variables.
However, the standard errors of the estimates are improved considerably.9

IV. Discussion of Results

Generalized least squares regression results are reported in Tables III and IV; and
ordinary least squares results are reported in Tables V and VI. On balance, the results
appear inconsistent with the notion that firms merge to reduce competition in acquired
firms' industries.10 A number of the estimated coefficients are clearly inconsistent
with the collusion hypothesis. For example, in the equation for dEVS (see Table III)
the coefficients of RSIZE, AGS, and HAG suggest that merger gains are negatively
related to the relative size of the acquisition, the relative size of the acquirer, and
concentration in the acquirer's industry. As discussed previously, if the motive for
merger is to reduce competition in the industry ofthe acquired firm, then merger gains
should be positively related to these characteristics. In the equation for dIEVSAD (see
Table IV), the coefficients of AGS, ROCAG, and ADS suggest that merger gains for
acquired firms' rivals are negatively related to the acquirer's relative size, the
acquirer's profitability, and the relative size of the acquired firm. Again, if the motive
is to reduce competition, then the gains for acquired firms' rivals should be positively
related to these characteristics.

The collusion hypothesis also implies that sources of gain for merging firms are
sources of gain for rivals as well. Therefore, the signs of the coefficients should be
the same in both equations. This is not the case, however, for several important
variables. For instance, the coefficient of RSIZE in the first equation is negative and
at least marginally significant, while in the second equation it is positive and highly
significant. The coefficients of acquiring-firm profitability, ROCAG, acquiring-indus-
try concentration, HAG, and acquired-firm relative size, ADS, have opposite signs as
well. Only the growth coefficients are consistent with the collusion hypothesis in each
equation.

These results suggest that the intent to reduce competition in acquired firms'
industries does not appear to be a widespread motive for merger. Consequently, the
notion that concentration represents an adequate index of competitive behavior is not
Volume 23 Number 3 1997 10

strongly supported. In contrast, the results do support to some extent the view that
mergers are driven by economies of scale and scope. For example, in the equation for
dEVS, the negative coefficient on AGS suggests that larger (smaller) gains arise
where acquirers are relatively small (large). Perhaps, smaller acquirers approach
minimum efficient scale via mergers while diseconomies set in for relatively large
acquirers. The existence of U-shaped cost curves is also suggested by the negative
relationship observed between RSIZE and dEVS. As the size of the acquired firms
rises relative to that of the acquirer, certain organizational frictions might be more
likely to impede the restructuring necessary for the realization of efficiency gains.
These frictions might be due, for example, to incompatible corporate cultures or to
the existence of entrenched, self-interested groups. It seems plausible that disecono-
mies of this nature would be more prevalent in mergers of equals than in mergers
where acquirers are much larger than acquired firms.

The economies of scale and scope argument also suggests that merger gains
should be negatively related not only to the acquirer's relative size but to its relative
profitability as well. In other words, acquirers that are truly marginalfirmsshould be
relatively small and relatively unprofitable prior to merger. Since thesefirmsshould
realize greater economies, merger gains should be negatively related to both size and
profitability. Although the negative coefficient on AGS is consistent with this
argument, the positive coefficient on ROCAG is not. Apparently, larger gains arise
where acquirers are relatively profitable. Moreover, the positive coefficient on
ROCAD suggests that larger gains arise where acquiredfirmsare relatively profitable
as well. Perhaps, the complementarities that exist between mergingfirmscan not be
exploited without sufficient internal sources of funds. In the presence of asymmetric
information between managers and outside investors, truly marginalfirmsmay have
only limited access to external sources of capital. Lacking internal funds, they may
be unable tofinancethe asset restructuring and investment needed in order to realize
significant gains from merger. In any event, the positive relationship between profit-
ability and merger gains casts some doubt on standard, textbook arguments based on
economies of scale and scope. Consequently, the Efficient Structure hypothesis,
which asserts that concentration reflects intra-industry efficiency differences, appears
to offer an incomplete explanation of industry structure, conduct and performance.

V. Summary

This research has examined the determinants of market value gains and losses in
corporate combinations for the purpose of gaining new insight into the broader
relationships among industry structure, conduct and performance. The gains and
losses of merging firms and of rivals of acquired firms are related to measures of
industry structure and of mergingfirms'competitive positions. Since, ceteris paribus,
corporate mergers increase concentration, these relationships provide evidence rele-
vant to the debate between adherents to Monopoly Power and Efficient Structure
views. Although the evidence is less than compelling, it does tend to favor the ES
view. However, the apparent fact that merger gains and profitability are related
positively suggests that the ES view may be incomplete. Clearly, the need for
additional research is indicated.
Volume 23 Number 3 1997 11

Table III
Generalized Least Squares regression results for change in merging-firm excess market value
(dEVS). Superscripts a, b and c denote statistical significance at the .01, .05 and .10 levels,
respectively, t-values are shown beneath the parameter estimates. N=79 observations. R2 is the
squared correlation coefficient between actual dEVS and predicted dEVS calculated on the basis
of GLS estimates. The regressions were run with no intercept.
Dependent Variable: dEVS

dIEVSAG 0.2767 0.2613 0.2481 0.2379

6.97a 1959a 6.94a 736 a
dlEVSAD 0.5019 05610 05959 0.4878
7.47a 12.15a 1335a 11.72a
RSIZE -0.0594 -0.0307 -0.0577 -0.0494
-2.41b -131 -3.12a -1.90c
AGS -0.1182 -0.1568 -0.0781 -0.1325
-5.06a -8.86a -5.65a -630a
ROCAG 0.2634 0.0891
3.61a 1.39
AG
NROC 0.1587 -0.0389
235 b -0.53
GSALEAG -0.0026 -0.0034
-554 a -3.61a
AG
GISALE -0.0009 -0.0026
-1.18 -3.45a
AG
H 0.0891 0.0359 0.0913 0.0552
4.02a 0.98 3.80a 1.16
ADS 0.1767 0.1762 0.1986 0.1488
2.99a 4.09a 8.98a 3.43a
ROCAD 0.6604 0.5314
12.47a 11.03a
AD
NROC 0.4600 0.3764
735 a
12.32a
AD
GSALE -0.0038 -0.0033
-5.37a -3.66a
AD
GISALE -0.0008 -0.0016
-1.29 -2.41b
HAD -0.0037 0.0730 0.0014 0.0676
-0.13 1.89c 0.05 1.47
2
R 344 300 333
378
Volume 23 Number 3 1997 12

Table IV
Generalized least squares regression results for change in acquired-industry excess market value
(dlEVSAD). Superscripts a, b and c denote statistical significance at the .01, .05, and .10 levels,
respectively t-values are shown beneath the parameter estimates. N=79 observations. R2 is the
squared correlation coefficient between actual dIEVSAD and predicted dIEVSAD calculated on the
basis of GLS estimates. The regressions were run with no intercept
Dependent Variable: dIEVSAD

RS1ZE 0.0946 0.0840 0.0773 0.0695

4.31a 4.01a 438 a 4.67a
AGS -0.0655 -0.0670 -0.0839 -0.0870
-7.78a -7.27a -6.92a -6.23a
ROCAG -0.1141 -0.1325
-2.74a -4.89 a
AG
NROC -0.1762 -0.2140
-4.46a -636 a
AG
GSALE -0.0001 -0.0002
-0.16 -038
GISALEAG -0.0065 -0.0049
-9.73a
-10.02a
HAG -0.1970 -0.1658 -0.1936
-0.2028
-9.89a -14.96a -8.32a -10.80a
ADS -0.0476 -0.0618 -0.0821 -0.0672
-3.81a -3.05a -4.12a -4.36a
ROCAD 0.1621 0.1626
5.21a 6.49a
AD
NROC 0.1404 0.0850
6.64a 5.88a
AD
GSALE -0.0010 -0.0011
a
-3.73 -537 a
AD
GISALE -0.0007 -0.0008
-1.11 -1.70c
HAD 0.0611 0.0356
0.0420 0.0369
2.26b 236 b 2.96a 1.80c
R3 . .143
138 .238
Volume 23 Number 31997 13

Table V
Ordinary Least Squares regression results for change in merging-firm excess market value
(dEVS). Superscripts a, b and c denote statistical significance at the .01, .05 and .10 levels,
respectively, t-values are shown beneath the parameter estimates. N=79 observations. The
adjusted R2 is shown at the bottom of the table.
DependentVariable:dEVS
CONST 0.0419 -0.1837 -0.0573 -0.2200
0.41 -1.42 -0.52 -1.62
AG
dIEVS 0.2694 0.2571 0.2666 0.2556
2.46b 2.40b 234* 230 b
AD
dIEVS 0.5531 0.5396 05654 05267
2.92a 2.92a 2.77* 2.65a
RSIZE -0.0630 -0.0488 -0.0681 -0.0631
-0.93 -0.74 -0.93 -0.89
AGS -0.1374 -0.1646 -0.0979 -0.1412
-1.29 -1.56 -0.87 -1.24
ROCAG 0.2456 0.1860
0.82 0.60
NROCAG 0.1424 -0.0039
0.42 -0.01
GSALEAG -0.0026 -0.0031
-1.29 -1.52
GISALEAG -0.0007 -0.0022
-0.13 -0.43
HAG 0.0776
0.0927 0.1005 0.0838
0.59 0.51 0.62 0.54
ADS 0.1965 0.1741 0.2236 0.1925
1.22 1.11 134 1.18
ROCAD 0.6868 0.6346
2.67a 2.40b
AD
NROC 05250 0.4244
c
1.97 1.57
GSALEAD -0.0042 -0.0038
-1.60 -1.51
GISALEAD -0.0005 -0.0010
-0.11 -0.24
HAD 0.0124 0.0355 0.0142 0.0379
2 0.08 0.22 0.09 0.23
R
346 380 302 339
Volume 23 Number 3 1997 14

Table VI
Ordinary least squares regression results for change in acquired-industry excess market value
(dIEVSAD). Superscripts a, b and c denote statistical significance at the .01, .05 and .10 levels,
respectively, t-values are shown beneath the parameter estimates. N=79 observations. The
adjusted R2 is shown at the bottom of the table.
Dependent Variable: dJEVSAD
CONST 0..1950 0.2030 0.2531 0.2339
3.19a 2.53b 4.45a 3.07
RSIZE 0.0984 0.0998 0.0581 0.0649
2.40b 2.43b 138 134
AG -0.0670 -0.0636 -0.0970 -0.1032
-0.99 -0.93 -1.49 -1.32
ROC AG -0.1745 -0.0884
-0.91 -0.48
AG -0.1782 -0.2609
NROC
-0.85 -131
AG 0.0000 0.0000
GSALE
-0.01 0.01
GISALEAG -0.0058 -0.0052
-1.94c -1.75
HAG -0.1974 -0.1518 -0.1750
-0.1895
-1.93c -2.05b -1.60 -1.89
ADS -0.0424 -0.0534 -0.0428 -0.0608
-0.41 -0.52 -0.43 -0.61
AD 0.1797 0.2066
ROC
1.09 1.32
AD 0.1056
NROC 0.1386
0.82 0.67
GSALEAD -0.0012 -0.0012
-0.71 -0.74
AD -0.0012 -0.0016
GISALE
-0.51 -0.67
HAD 0.0479 0.0402 0.0551 0.0612
0.47 039 0.36 0.62
R2 .125 .132 .205 .202
Volume 23 Number 3 1997 15

Endnotes
1. Schmalensee (1987) provides an insightful overview of this debate.
2. Exceptions include Cheng and Weston (1982); Choi and Philippatos (1984);
Agrawal, Jaffe and Mandelker (1992); and Franks, Harris and Titman (1991). These
studies are generally concerned with the existence rather than sources of value gains
and losses.
3. See for example Ellert (1976) and Eckbo (1983, 1985).
4. See, for example, Eckbo (1985), p.328.
5. By assumption, εi and μi are normally and independently distributed with zero
means and variances given byσ2εijandσ2μi.Generalized least squares estimation is
employed to account for heteroscedasticity. All covariances are assumed equal to
zero: i.e. E( εi εj = E(μi μj) = 0 wherei≠j , and E( εi μj) = 0 for all i and j.
6. EVS has been employed by Thomadakis (1977), Connolly and Hirschey (1984),
Hirschey (1985), and Defusco, Philippatos and Choi (1988). Others have employed
various approximations to Tobin's q which are closely related to EVS both in concepts
and construction. These studies include Lindenberg and Ross (1981), Hirschey
(1982), and Smirlock, Gilligan and Marshall (1984).
7. The entropy has been employed as an index of industrial concentration in previous
studies. See, for example, Finkelstein and Friedberg (1967); Theil (1967); Horowitz
and Horowitz (1968); and Horowitz (1970, 1971).
8. Marfels (1971, 1972) shows that the entropy has the more desirable mathematical
properties among the set of alternative measures of industrial concentration.
9. These results are available from the author upon request. Some experimentation
was involved in choosing the final form of the regression equations. In general,
parameter estimates were quite stable under various formulations. Also, the addition
of explanatory variables to the model tended to produce lower standard errors,
suggesting the absence of serious problems due to multicollinearity.

10. This does not imply the total absence of such mergers. Rather, given that corporate
combinations are driven by various motives and given the heterogeneity of this
sample, the relationships that emerge do not support the view that the intent to collude
is a widespread motive for merger.
Volume 23 Number 3 1997 16

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Volume 23 Number 3 1997 18

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