Comment on ?small firms and merger mania?

Abstract

Considering its importance to the field of industrial organization, our understanding of the determinants of firm size has some major gaps. This becomes quite clear upon reading Aiginger and Tichy's recent review (hereafter, A&T (1991)) of the many empirical studies of firm size. They critically examine the separate literatures on the performance of large and small firms and on the efficiency of mergers. They find inconsistencies within each of these literatures. More interesting, they discuss a glaring inconsistency between the evidence in the literature and actual behavior. While much of the performance literature indicates that small firms have average or superior performance, large firms typically takeover smaller firms. Efficiency and survival would seem to dictate against this "merger mania." A&T provide a number of interesting insights. They offer six hypotheses on why small firms might outperform large firms, and challenge the industrial organization view that economies of scale and scope require large firm size. They stop short, however, of arguing that large firms are inefficient, recognizing that they may simply perform different roles than small firms. Their discussion or mergers is more critical of large firms. While they do not entirely dismiss the possibility that mergers may yield efficiencies, they offer six alternative hypotheses. They suggest that mergers tend to r&ieCi tnance, StotiniAierormanagenTeili optimism, nonprofit maximizing behavior, and other unproductive tendencies. This comment focuses on the role of firmspecific capital, product life cycles and product niches. The relative performance of large vs. small firms is reconsidered in this light, followed by an examination of the merger literature and the practice of takeovers by large firms. Large firms are viewed less skeptically here than by A&T. Nevertheless, the purpose of this note is less to challenge A&T, than to elaborate on some of their points and suggest additional possibilities. The questions raised by A&T are central to the field of industrial organization and worthy of further attention.