Abstract
We examine merger activity and its effect on asset pricing in a firm network economy. Mergers create internal capital markets which change the cash flow risk structure of the merging firms. We propose a solution concept for coalitional games without the superadditivity axiom, which extends the Shapley value, and apply it to the merging activity of firms in a network. The results show that firm values in a network should not be considered in isolation. Merger corrections increase the equity value of the firms. Higher network dependence decreases the number of coalitions formed, i.e. it encourages mergers, and gives higher value to a merging firm. Recession (prosperity), as measured by the average debt/total assets ratio, generally increase (decrease) the number of coalitions in a network.
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