Predicting Merger Outcomes: How Accurate are Event Studies, Market Structure Determinants and Agency Decisions

Abstract

Merger analysis is an exercise in prediction. This paper analyzes the accuracy of two leading methods of predicting merger outcomes – stock market event studies, and a market-structure/Merger Guidelines approach – as well as the accuracy of antitrust agencies’ decisions whether or not to challenge mergers. The basis for these evaluations of accuracy is a data base of actual price effects of some forty mergers compiled from published merger retrospectives. This paper finds that event studies systematically underpredict the incidence of anticompetitive outcomes, while market structure criteria overpredict competitive problems. Since market structure serves primarily as an initial screen for agency analysis,initial over-inclusiveness may be the optimal first stage of the process of policy determination.