Mergers and Asset Prices in a Firm Network Economy

We examine merger activity and its effect on asset pricing in a firm network economy. Mergers create internal capital markets which change the cash flow risk structure of the merging firms. We propose a solution concept for coalitional games without the superadditivity axiom, which extends the Shapley value, and apply it to the merging activity of firms in a network. The possibility of a merger increases the equity value of standalone firms. Higher network dep endence generally increases merger activity but nevertheless causes lower firm equity values. Recession and expansion, as measured by the average debt/total assets ratio, generally decrease the number of coalitions in a network, generating an inverted U-shaped curve of merger activity.