Research

Abstract: This paper investigates the evidence and implications of financial synergies in mergers and acquisitions (M&A). Financial synergies arise when one firm's superior financial condition benefits another firm that is financially constrained but expects a higher return on investment. Using micro data, I find that the target's average revenue product of capital (ARPK) exceeds that of the acquirer, implying that the target's capital investment return is higher than the acquirer's. This finding is inconsistent with the conventional wisdom from average Q in M&A, which posits that M&A is a process of physical capital reallocation from targets to acquirers. To resolve this discrepancy and evaluate its aggregate implications, I develop a dynamic general equilibrium M&A search model with financial frictions. The calibrated model reconciles the two statistics and demonstrates that the investment implication by average q can be misleading. I find M&A results in an 8% increase in output and a 5% improvement in TFP. Moreover, M&A mitigates 46% of the TFP loss from misallocation, accounting for 20% of the TFP gains generated by M&A. However, M&A also leads to a decrease in the number of firms and entrants, and exacerbates the financial polarization among firms.

Abstract: Since the 1980s, wealth inequality has steadily risen while real interest rates have declined. To assess the implications of low interest rates on wealth distribution and economic growth, I develop an analytically tractable endogenous growth model with creative destruction, which features heterogeneous returns for households. The model highlights that low interest rates increase both the growth rate and wealth inequality in the balanced growth path. This is because low interest rates amplify asset prices, enhancing returns from establishing new firms through creative destruction. This environment especially benefits those who invest in entrepreneurial activities and constitute a significant fraction of the top wealth holders.

Abstract: This paper empirically investigates the impact of mergers and acquisitions (M&As) on firm-level markups using a robust difference-in-differences approach with staggered adoption. Utilizing the annual CRSP/Compustat Merged (CCM) Database and the markup measures developed by De Loecker, Eeckhout, and Unger (2020), this study assesses whether M&As contribute to the increasing markup trend observed since the 1980s. The findings indicate that M&As do not lead to an increase in acquirers’ markups and, in some cases, may even reduce them. Additional analyses reveal that while gross profit and EBITDA increase post-M&A, net profit does not, primarily due to the higher debt burden incurred. Furthermore, evidence on Tobin’s Q and average revenue product of capital (ARPK) suggests that the typical M&A is deemed a failure by the market. However, the negative effects on the acquiring firm’s performance are mitigated in more recent M&A cases.

Abstract: We consider a model of joint ventures where agents produce their revenue through collaborating with their superiors in a hierarchical network (a directed tree). Hence, a coalition with all superiors of its members has the collective ownership of the revenue. Our main axiom for revenue sharing is the standard monotonicity with regard to the collective ownership. We establish representation theorems of monotonic allocation rules. They are represented by hierarchical transfers of the revenue at each position to the superiors. When the rate of transfer is symmetric over the hierarchy, the rules coincide with the geometric rules (the sequence of ownership rights of superiors is geometric). When the rate of transfer is asymmetric, other fair allocation rules are admissible; a focal example is the hierarchical equal sharing rule, which is shown to be uniquely fair among all hierarchical transfer rules.