The Role of Stock Market Studies in Formulating Antitrust Policy toward Horizontal Mergers: Reply
Werden, Gregory J., Williams, Michael A., Quarterly Journal of Business and Economics
The Role of Stock Market Studies in Formulating Antitrust Policy Toward Horizontal Mergers: Reply
Several studies have attempted to assess current antitrust policy toward horizontal mergers by analyzing the movements of stock returns for rivals of firms involved in past mergers challenged by the government. Werden and Williams  contend that these studies are inherently inadequate bases for formulating merger policy. They also contend that the study by B. Espen Eckbo and Peggy Wier  suffers from many serious problem of outright mistakes. B. Espen Eckbo  takes issue with nearly every point, but his responses generally neither deny nor negate the points made. A few of his remarks do merit comment, however.
First, Eckbo asserts that all the arguments are purely speculative. In point of fact, stock market studies of the competitive effects of mergers are based entirely on the mere speculation that the stock market has more reliable information on the competitive effects of mergers than do the antitrust enforcement agencies. Neither Eckbo nor anyone else has offered even the slightest evidence that such is the case. Unless such evidence is produced, there is no reason to trust what the stock market may say any more than what the enforcement agencies say.
Second, in response to the argument that many rivals derive only a small portion of their revenues from the affected market(s), Eckbo state that this cannot be too serious a problem because there is an observed effect on rivals' stock prices from merger announcements. This response ignores the possibility that the observed effect actually derives from collusive, efficiency, or other effects in other markets. Eckbo also appears to assert that using rivals identified by the enforcement agencies solves the problem. He does not indicate why, and the Werden and Williams research into the issue leads one to conclude that the reverse is true.
Third, in response to the argument that a merger and complaint announcements affect stock prices by changing expectations about future mergers, Eckbo states that this effect should be small enough so that complaint announcements still should have negative effects on rivals' share prices for collusive mergers. This is not convincing. The benefits from being a target have been found to be quite large, while the observable stock-price effects of anticompetitive mergers are small. Eckbo also appears to argue that the actual merger that was announced would not have been the wealth-maximizing merger if Werden and Williams are correct, but he does not explain why. …