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Chiu, Liang-Chieh
Haltiwanger, John
Stevens, Luminita
This dissertation studies the impact of horizontal mergers on firm dynamics, innovation, and aggregate economic growth. In Chapter 1, I investigate how firms’ incentives to pursue in-house innovation versus acquisitions shape aggregate innovation and growth. I develop a tractable growth model with heterogeneous firms in which incumbent productivity evolves through engaging in endogenous innovation or through search and matching with innovative acquisition targets. The key innovation on the modeling side is the simultaneous inclusion of both R&D and M&A activities to capture potential spillovers from one activity to the other. With the model parameterized to match a set of facts on the U.S. M&A activity as well as moments of the R&D-to-sales ratio, the long-run growth rate and the entry rate of new entrants, I show that M&A activity accounts for 11.6% of U.S. long-run productivity growth during the period between 1979 to 2000. To explore the implications of M&A for aggregate innovation and aggregate economic outcomes, I perform a counterfactual analysis using the calibrated model to trace the effects of a looser merger policy on firm-level innovation, selection into the M&A market and aggregate growth. I find that a looser merger policy incentivizes small firms to innovate more while reducing the R&D investments of large firms. Overall, the quantitative analysis suggests a beneficial impact of M&A on aggregate growth and welfare. Chapter 2 examines how merger policy affects M&A activity across the firm size distribution. I study firm responses to a specific merger policy change implemented in the United States in the year 2001: the change increased the transaction threshold for required pre-merger notifications pursuant to the Hart-Scott-Rodino Act. I construct a difference-in-difference research design to study the change in the number of horizontal mergers pre- and post-amendment, in comparison to non-horizontal mergers for each size group. I find that the increase in the exemption threshold stimulates merger activity among always-exempt competitors. The results contrast those of Wollmann (2019), who found significant increases in newly-exempt horizontal mergers. I trace the difference to the misclassification of merger size and measurement issues in transaction values in the original study. The impact of the HSR amendment on always-exempt horizontal mergers can be interpreted as an entry effect or a spillover effect of deterrence. As found in chapter one, a relaxed merger policy endogenously lowers the entry threshold, and thus more small firms comprise the firm size distribution. This may lead to more small transactions following the amendment in the long run. Another potential effect is the spillover effect of antitrust enforcement. Mergers that were slightly below the original transaction threshold ran the risk of being investigated, so the parties may have been discouraged from merging under the original policy.