Do Horizontal Mergers Affect Rivals' Cash Holdings?

Thumbnail Image



Journal Title

Journal ISSN

Volume Title


Research Projects

Organizational Units

Journal Issue


The effect of horizontal mergers on industry competition relies on the relative importance of the efficiency effect to the market power effect. Under the efficiency hypothesis, the non-merging rivals would have more motives to improve their own efficiency to survive competition. This paper examines rivals’ efficiency via the lens of their cash policies. I find that in response to horizontal mergers, rivals with higher Tobin’s Q increase cash holdings and investments. The effect is greater among the constrained rivals. On the other hand, rivals with lower Tobin’s Q reduce cash holdings and increase payouts. The effect is greater for the liquid rivals. Overall, these results suggest that horizontal mergers induce rivals to behave as if they improve the efficiency of cash policies, which is consistent with the idea that horizontal mergers on average do not harm industry competition.


Business: 1st Place (The Ohio State University Edward F. Hayes Graduate Research Forum)