Mergers/Acquisitions in Production Networks

Propagation in networks is largely shaped by the capability of links to carry the transmission. This paper distinguishes and evaluates the importance of different links using the production network data of 3,160 U.S. firms. We study the diffusion of 1,128 mergers and acquisitions (M&As) taking place during 2007-2014. To emphasize the differences between links, we decompose the overall spillover into “direct spillover" that spreads directly between firms, and “indirect (or rebound) spillover" that spreads between firms through their common suppliers and customer. We tackle decomposition and the endogeneity of M&As using the mediation analysis alongside instrument variables in a network framework. The results reveal substantial evidence of diffusion radiating from the target firms. In the process of diffusion, the indirect spillover has a dominant role, carrying more than 70% of the diffusion while the role of direct spillover is negligible. In addition, the overall spillover is offset if the products of firms are substitutable