Antitrust Policy and Mergers: The Wealth Effect of Supreme Court Decisions
McWilliams, Abagail, Turk, Thomas A., Zardkoohi, Asghar, Economic Inquiry
Since its inception in 1890, antitrust has been one of the most controversial areas of law. Some view antitrust enforcement as efficiency enhancing, leading to a greater degree of market competition than would otherwise be attainable.(1) Others view antitrust enforcement as an intrusion into the natural economic order and, as such, efficiency decreasing.(2) The controversy ostensibly is manifested in the uncertainty surrounding the effect of antitrust on the structure of industry in the United States.
An important aspect of the controversy involves the effect of enforcement of the merger law, Section 7 of the Clayton Act, as amended by the Celler-Kefauver Act in 1950.(3) The literature on the enforcement effects of the merger law is generally divided into four branches. One branch concerns the political economy of government antitrust enforcement. For example, Coate et al. |1990~ argued that because "merger challenges, like antitakeover legislation, prevent the exit of resources and votes from a politician's jurisdiction," politicians are expected to respond to organized labor and management interests by instigating FTC merger challenges. A second branch compares the differential effects of the law upon horizontal, vertical, market extension, product extension, and conglomerate mergers. For example, Scherer |1980~ presented evidence that the percentage (measured in asset value) of horizontal mergers declined from 37 percent during the 1948-1955 period to only 12 percent during the 1963-72 period, while the percentage of pure conglomerate mergers increased from 3 percent to 33 percent for the same time periods. A third branch examines the effect of the merger law on market structure. For example, Eckbo |1983~ tested the hypothesis that mergers are used to gain monopoly power. He found evidence to the contrary: mergers in general increased competition. Finally, a fourth branch examines the effect of enforcement on the value of firms involved in merger suits. For example, Wier |1983~ estimated the costs of enforcement to shareholders of firms whose mergers were challenged.
Uncertainty about the effect of enforcement is reflected by Stigler |1982, 44~ who noted that "It would be gratifying to me if I could report that our profession's changing view |on the effect of antitrust~ was based upon the systematic study by economists of the effects of the policy, in short, that hard evidence carried the day. Unfortunately, there have been no persuasive studies of the effects of the Sherman and Clayton Acts throughout this century."(4) Our purpose in this paper is to examine and provide empirical evidence on an aspect of enforcement that has in general been ignored in the literature. Our basic hypothesis is that Supreme Court litigation outcomes have ripple effects that extend beyond their direct effect on the challenged mergers. To test this hypothesis, we examine the magnitude of these ripple effects by measuring the stock market reaction to Supreme Court merger decisions for firms engaged in merger negotiations.
The balance of this paper is organized as follows: section II discusses the effect of Supreme Court decisions on target firm value; section III provides a summary review of previous research on enforcement effects; section IV describes our empirical model; section V presents our empirical results; and section VI contains concluding remarks.
II. SUPREME COURT DECISIONS AND TARGET FIRM VALUE
Supreme Court merger decisions may send important signals about changes in enforcement and thus changes in the cost of compliance to all concerned, including firms participating in ongoing mergers. We argue that market participants perceive the Court's decisions as newsworthy because the Court has been "the central institution in making antitrust law.... That is true because the antitrust laws are so open-textured, leave so much to be filled in by the judiciary, that the Court plays in antitrust almost as unconstrained a role as it does in constitutional law" (Bork |1978, 409~). …