Acquisitions, Productivity, and Profitability: Evidence from the Japanese Cotton Spinning Industry

Abstract

We explore how changes in ownership affect the productivity and profitability of producers. Using detailed data from the Japanese cotton spinning industry at the turn of the last century, we find that acquired firms’ production facilities were not on average less physically productive than the plants of the acquiring firms before acquisition. They were much less profitable, however, due to higher inventory levels and lower capacity utilization—differences that reflected problems in managing the uncertainties of demand. After acquisitions, less profitable acquired plants saw drops in inventories and gains in capacity utilization that raised both their productivity and profitability levels. (JEL D24, G32, G34, L11, L25, L66, N65) The influence of changes in corporate control of assets on productivity has been a focus of theoretical and empirical research for some time. In principle, mergers and acquisitions can reallocate control of productive assets to entities that are able to apply them more efficiently. Besides increasing the productivity of the individual production units that are merged or acquired, a broader process of such reallocations can also lead to aggregate productivity growth. Such a mechanism therefore has the potential to explain patterns of productivity at both the micro- and macro-levels. Implicit in the story of this mechanism—though not often treated explicitly in the empirical work on the subject—is the notion that productivity growth occurs when changes in ownership and control put assets in more able managers’ hands. 1