Firm-Specifi c Time Preferences and Postmerger Firm Performance

Abstract

This study investigates the role of firm-level discount factors in evaluating the impact of mergers on market outcomes. Discount factors reflect time preferences for future cash flows and are used to determine the present value of investment projects such as mergers. Firm-specific discount factors imply that firms may attach different present values to mergers. We elicit firm-specific time preferences and identify firms' discount factors using firm-specific production data while building on the existence of learning-by-doing in the semiconductor industry. Our estimation results show that firm-specific discount factors explain firms' production decisions. We also find that firms' discount factors and merger acquisition strategies explain heterogeneous merger outcomes. Our results show that acquiring firms characterized by low discount factors (impatient firms) are highly efficient and merge with highly efficient and innovative firms. Impatient acquirers achieve relatively higher efficiency gains in the short run than patient acquirers and adopt acquisition strategies that put more weight on achieving instant efficiency gains. In contrast, patient acquirers are least efficient and merge with firms that are larger than themselves. Patient acquirers place more value on achieving efficiency gains in the more distant future.