Academic journal article Quarterly Journal of Business and Economics

The Role of Stock Market Studies in Formulating Antitrust Policy toward Horizontal Mergers: Comment

Academic journal article Quarterly Journal of Business and Economics

The Role of Stock Market Studies in Formulating Antitrust Policy toward Horizontal Mergers: Comment

Article excerpt

The Role of Stock Market Studies in Formulating Antitrust Policy Toward Horizontal Mergers: Comment


Since 1950, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have filed more than 500 antitrust suits against firms involved in mergers. The charge has been that these mergers reduce competition and violate Section 7 of the Clayton Act, the principal federal antitrust law regulating corporate mergers and acquisitions. Eckbo [2] and Stillman [7] offer a new approach to examining the anticompetitive significance of challenged mergers. This approach analyzes the abnormal stock price performance of merging firms and their close competitors during acquisition and prosecution periods. If a horizontal merger is expected to change competition in the merging firms' industry, the resulting change in product and factor prices will be anticipated at the time of the merger announcement, causing the merging firms and their rivals to earn abnormal stock returns. The direction of the abnormal returns to the rivals can be used to discriminate between alternative theories explaining the nature of the expected change in industry competition. Based on samples of horizontal mergers that were challenged under Section 7 prior to 1978, this methodology leads both Eckbo and Stillman to reject the proposition that the typical challenged merger would have been anticompetitive.

How can the government's apparent failure to prosecute anticompetitive mergers be explained? Eckbo and Wier [6] examine the proposition that legal constraints in effect during the Eckbo and Stillman sample periods prevented the agencies from obtaining the information needed for accurately judging a merger's competitive impact before filing a complaint. The implementation of the Hart-Scott-Rodino Antitrust Improvements Act in September 1978 significantly relaxed these constraints. A major purpose of this act was to increase the precision with which defendants are chosen by providing the agencies more information about potential Section 7 violations and more time to analyze the information before they take legal action.

The Hart-Scott-Rodino Act requires advance notification of mergers above a specified size, and it allows the agencies to defer legal completion of the transactions for a limited period of time. Furthermore, it allows the agencies to request information of relevance for judging the competitive impact of a merger from third parties such as competitors of the merging firms. The response to such requests apparently has been of value to agencies; in its 1983 annual report to Congress, the FTC states that this information "usually is sufficient ... to make a prompt determination of the existence of any antitrust problems raised (by the merger)." By analyzing cases brought after the introduction of the Hart-Scott-Rodino Act, Eckbo and Wier test the proposition that the additional time and information granted the enforcement agencies have improved their selectivity.

As indicated by the above quote, Werden and Williams [8] take issue with the idea that one can use stock prices to test the ability of the enforcement agencies to select anticompetitive mergers for prosecution. This comment critically examines their speculations concerning the reliability of the event study methodology in general and the results of Eckbo and Wier in particular. Werden and Williams present no new evidence to shed light on the central empirical issues, and several of their statements are severely misleading. The lack of an empirical contribution is disappointing, particularly given the length of time (more than three years) the Department of Justice has had access to the original Eckbo-Wier data.

Summary of Eckbo and Wier

Before turning to specifics about the Werden and Williams paper, it is useful to summarize the economic hypotheses and main empirical findings of Eckbo and Wier. …

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