A RE-EXAMINATION OF EVENT STUDIES APPLIED TO CHALLENGED HORIZONTAL MERGERS

A growing body of empirical studies have been interpreted as support for a laissez-faire policy towards mergers. These "event studies" examine the reaction of stock market prices of firms that announce an agreement to merge. The type ~f reaction reveals whether a merger is motivated by a desire for market power or purely to improve market efficiency. In this paper, a version of the capital asset pricing model (CAPM) is applied to determine if abnormal returns are earned by rivals of 22 pairs of firms whose attempted horizontal mergers were challenged by the federal antitrust agencies. At most eight, and possibly only five, of the cases were found to be motivated by efficiency in seeking merger, and at most six, and possibly only one, were motivated by market power; the rest were inconclusive. The event-study technique is highly flawed for the study of business-regulation effects. Numerous unrealistic assumptions, inappropriate data constraints, and questionable interpretations hamper .the application of this technique to policy analysis.