Dissertation
Essays in mergers and acquisitions, innovation and product markets
University of Iowa
Doctor of Philosophy (PhD), University of Iowa
Summer 2021
DOI: 10.17077/etd.005828
Abstract
This dissertation explores three central topics in corporate finance: mergers and acquisitions, innovation, and product markets. In the first chapter, we examine the impact of shocks to competition within a product market on the innovation activity of rivals. In the second chapter, we study the influence of synergy gains and the exercise of market power on product prices following mergers and acquisitions. In the third chapter, we investigate the role of divestitures that accompany horizontal mergers on the combined firm’s market power potential and the competitiveness within the combined firm’s industry.In Chapter 1 titled “Competition and Innovation Revisited: A Product-Level View,” we study the effect of competition on firm innovation at the product level. We instrument shocks to competition in therapeutic areas with the FDA’s breakthrough therapy designation (BTD) event on a therapy. BTD events strongly associate with several indicators of future success, including announcement returns and eventual FDA approval to market the drug. BTD shocks discourage rivals’ innovation in that therapeutic area on average. However, the effect varies with ex-ante competitiveness of the therapeutic area, as well as with the rival’s position (leader vs. follower) in that space. Our evidence is consistent with the theory in Aghion et al. (2005).
In Chapter 2 titled “Seeking efficiency or price gouging? Evidence from pharmaceutical mergers,” we show that pharmaceutical mergers are a response to ex-ante competitive pressure, and in turn, reduce product market competition. Although egregious drug price increases are not widespread, merger-induced reduction in competition does help prop up prices. We also find robust support for the efficiency perspective of mergers. Firms with a high product overlap are more likely to merge and mergers are followed by a decline in the price of drugs that are similar across the acquirer and target portfolios. This decline is likely due to efficiency gains in the R&D process and reduction in operating expenses.
In Chapter 3 titled “The role of divestitures in horizontal mergers,” we show that divestitures accompanying horizontal mergers affect both the market power potential and the competitive efficiency of merging firms. Stock price reactions of customer firms are more positive (hence divestitures are more effective in mitigating the market power impact of the merger) if merging firms divest assets to buyers outside the industry rather than existing rivals. This result is stronger when the merging industry is more concentrated and when powerful customers are absent. Stock price reactions of the acquirer and rivals suggest that firms are more concerned with maintaining a competitive edge relative to each other than gaining market power relative to customers.
Details
- Title: Subtitle
- Essays in mergers and acquisitions, innovation and product markets
- Creators
- Mosab Hammoudeh
- Contributors
- Jon Garfinkel (Advisor)Amrita Nain (Advisor)Artem Durnev (Committee Member)Erik Lie (Committee Member)Yiming Qian (Committee Member)Ashish Tiwari (Committee Member)
- Resource Type
- Dissertation
- Degree Awarded
- Doctor of Philosophy (PhD), University of Iowa
- Degree in
- Business Administration
- Date degree season
- Summer 2021
- DOI
- 10.17077/etd.005828
- Publisher
- University of Iowa
- Number of pages
- xiii, 231 pages
- Copyright
- Copyright 2021 Mosab Hammoudeh
- Language
- English
- Description illustrations
- color illustrations
- Description bibliographic
- Includes bibliographical references (pages 170-177).
- Public Abstract (ETD)
Innovation is one of the main drivers of economic growth. Understanding the relationship between competition and innovation can help guide policies that encourage competition which in turn impacts innovation. My paper examines this relationship at the product-level and finds that this relationship depends on two things: the competitiveness of the market, and how much is at stake for the firm. Following a shock to competition, firms with less at stake tend to innovate less in competitive markets, and more in markets with lower competition. These results help reconcile previous conflicting findings and provide insights regarding the intricacies of this relationship.
Next, the recent drastic growth in drug prices coupled with the significant consolidation in the pharmaceutical industry have led business media, politicians and academics to flag mergers and acquisitions as a possible driver of higher prices. My paper uses a comprehensive sample of drug prices and mergers and acquisitions to examine whether these accusations are true. We find evidence for both market power and synergy gains; drugs that overlap between acquirers and targets drop in price following the merger suggesting that synergy gains result in lower costs which manifest through lower prices. However, we also find that non-overlapping drugs significantly increase in price after the merger.
Finally, my thesis studies the impact of divestitures that accompany horizontal mergers on the levels of competition after the merger. We find that divestitures are effective in preserving competition if the divested asset is sold to buyers outside the industry rather than existing rivals.
- Academic Unit
- Tippie College of Business
- Record Identifier
- 9984124572402771
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