We examine how product similarity and competition influence mergers and acquisitions and the ability of firms to exploit product market synergies through asset complementarities. Using novel text-based analysis of firm 10-K product descriptions, we find three key results. (1) Firms are more likely to enter mergers with firms whose language describing their assets is similar. (2) Transactions in competitive product markets with similar acquirer and target firms experience increased stock returns and real longer-term gains in cash flows and higher growth in their product descriptions. (3) These gains are higher when the target is less similar to the acquirer’s closest rivals, and when firms have the potential for unique products. Our findings are consistent with firms merging and buying assets to exploit asset complementarities and to create new products to increase product differentiation.

JEL classification: G30 G34 C70 Keywords: Mergers and acquisitions Division of gains Product market relations Bargaining a b s t r a c t In contrast to the widely held belief that targets capture the lion's share of merger gains, I show that the average dollar gains to targets are only modestly more than the dollar gains to acquirers. To help explain the variation in merger outcomes, I present empirical evidence in support of a new hypothesis that a target's relative scarcity (proxied by its market power) and product market dependence (proxied by customer-supplier relations) help to explain its share of the total merger gains. These results provide new evidence for an unexplored role of product markets on bargaining outcomes in mergers.

Firms have an incentive to manage media coverage to influence their stock prices during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substan-tially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders ’ stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price. THE RELATION BETWEEN INFORMATION and stock prices is central to finance, dat-ing back to at least Fama et al. (1969). Key to this relation is the financialmedia, which serves as the main channel through which information is disseminated to investors. Recent research shows that media coverage drives market trading (Barber and Odean (2008), Engelberg and Parsons (2011)) and affects prices

Using a large and unique patent-merger data set over the period 1984 to 2006, we show that companieswith large patent portfolios and lowR&Dexpenses are acquirers, while companies with high R&D expenses and slow growth in patent output are targets. Further, technological overlap between firm pairs has a positive effect on transaction incidence, and this effect is reduced for firm pairs that overlap in product markets. We also show that acquirers with prior technological linkage to their target firms produce more patents afterwards. We conclude that synergies obtained from combining innovation capabilities are important drivers of acquisitions. IT HAS LONG BEEN argued that synergies are key drivers of mergers and ac-quisitions (M&As),1 and that many M&As occur due to technology reasons.2 However, there is little direct evidence of whether and how synergies in the

Copyright © 2014 by Ramana Nanda and Matthew Rhodes-Kropf Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

Abstract. We examine firms strategic incentives to engage in horizontal mergers. In a real options framework, we show that strategic considerations may explain abnormally high takeover activity during periods of positive and negative demand shocks. Importantly, this pattern emerges solely as a result of firms strategic interaction in output markets. We show that the U-shaped relation be-tween the state of demand and the propensity of firms to merge, documented in past studies, is driven by horizontal mergers in industries that are: (1) relatively more concentrated, (2) characterized by relatively strong competitive interaction among firms, and (3) characterized by relatively low merger-related operating synergies and restructuring costs. The empirical evidence, based on para-metric and semi-parametric regression analyses, is consistent with these predictions. JEL Classification: G34 1.

This article develops a real options model to study the interaction of industry structure and takeovers. In an asymmetric industry equilibrium, firms have an endogenous incentive to merge when restructuring decisions are motivated by operating and strategic benefits. The model predicts that (i) merger activities are more likely in more concentrated industries or in industries that are more exposed to industrywide shocks; (ii) returns to merger and rival firms arising from restructuring are higher in more concentrated industries; (iii) increased industry competition delays the timing of mergers; and (iv) in sufficiently concentrated industries, bidder competition induces a bid premium that declines with product market competition.

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The dissertation consists of three essays on international capital flows. In the first essay, titled “Do small firms benefit more from foreign portfolio investment? Evidence from a Natural Experiment, ” I test whether an increase in the supply of foreign portfolio capital benefits small firms by using the Thai government’s unique restriction on capital inflows as a natural experiment. The Thai government imposed a very stringent capital control on December 19, 2006, and then quickly abandoned it one day later. Al-though many other studies have been plagued with the difficulty of separating the impact of foreign capital from the impact of other concurrent events, this experiment helps me solve the time-series identification problem. My results suggest that foreign portfolio in-vestment helps large firms the most, contrary to existing evidence, which finds a benefit in foreign portfolio investment for small firms. I also investigate the importance of other firm characteristics correlated with size, which includes a firm’s exchange rate exposure, foreign ownership, and political connection. The next two essays are on the dynamic patterns of international mergers and acquisitions. In the second essay, I uncover key facts about international M&As by estimating a variety

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