Cross-Border Mergers with Flexible Policy Regime: The Role of Efficiency and Market Size

Abstract

This study provides a theoretical and empirical framework for understanding the determinants of cross-border mergers. Past literature has focused on the effect of trade liberalization as the key factor triggering international mergers. We introduce the idea of flexible policy regime in which optimal policies are sensitive to whether a cross-border acquisition has taken place or not. In a free-trade model given asymmetries in marginal cost, we find that optimal subsidies decline when firms acquire inefficient foreign firms while optimal subsidies increase when firms acquire efficient firms. We also find that as the efficiency of the acquirer increases, the profitability of the acquisition and hence the likelihood that it takes place also increases. We find that the role of market size in triggering cross-border acquisitions may be limited even with free trade.

Department(s)

Economics

Keywords and Phrases

Efficiency; Flexible policy; Japan; Market size; OECD; Production tax

International Standard Serial Number (ISSN)

0889-1583

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2014 Academic Press Inc., All rights reserved.

Publication Date

01 Dec 2014

Link to Full Text

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