Research

Rise of Startup Acquisitions and the Slowdown of Recoveries (Job Market Paper)

Abstract

Startup acquisitions have become increasingly common over recent decades, and at the same time, recessions have become longer. Young firms are more likely to be acquired during recessions. Such acquisitions can affect the economy's response to aggregate shocks by reshaping the distribution of firms and the extent of competition between them. 

I study a general equilibrium model with oligopolistic competition, endogenous entry and exit, and startup acquisitions. In the model, an incumbent can acquire a potential entrant, and such an acquisition may improve the incumbent's productivity. It also eliminates a potential competitor and fosters the formation of a dominant incumbent. The emergence of a dominant firm facilitates future startup acquisitions by reducing the value of entry. 

I evaluate my model's firm-level predictions by merging the Refinitiv Eikon M&A database and Compustat. In both model and data, a firm is more likely to acquire startups when its markup is high relative to other firms in its industry. Startup acquisitions, in the model economy, slow aggregate recoveries following recessions. A persistent shock to TFP with seven years of half-life leads to a decrease in output with 21 years of half-life. The gap between the exogenous TFP and measured TFP widens gradually as a result of a decline in the number of producers and an increase in average markups. Moreover, a temporary shock disproportionately affecting potential entrants leads to a sharp decline in the number of producers and has a prolonged effect on the economy as it takes time to recover the number of producers.

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