Does the Ruling to Break Up Microsoft Add Value to Its Competitors and Other High-Tech Companies?

Abstract

In this study, we examine the impact of the announcements of the ruling to break up Microsoft into two independent companies on the market values of Microsoft, Microsoft’s competitors and other firms operating in computer related industry. Our empirical results show that the stock price of Microsoft declined substantially on the day when the Department of Justice proposed to break up the company. In addition, significant negative abnormal returns are also observed for Microsoft’s competitors and other firms operating in the computer industry. This result contradicts the belief that a stricter enforcement of the antitrust laws will benefit Microsoft’s competitors. Although significant negative abnormal returns are also observed on the final hearing day, the abnormal negative returns on the ruling day is not statistically significant. This is perhaps an indication that the market has already factored in a high likelihood that the judge will rule to break up Microsoft as a remedy.