Quantification of the evolution of firm size distributions due to mergers and acquisitions

The distribution of firm sizes is known to be heavy tailed. In order to account for this stylized fact, previous studies have focused mainly on growth through investments in a company's own operations (internal growth). Thereby, the impact of mergers and acquisitions (M&A) on the firm size (external growth) is often not taken into consideration, notwithstanding its potential large impact. In this article, we make a first step into accounting for M&A. Specifically, we describe the effect of mergers and acquisitions on the firm size distribution in terms of an integro-differential equation. This equation is subsequently solved both analytically and numerically for various initial conditions, which allows us to account for different observations of previous empirical studies. In particular, it rationalises shortcomings of past work by quantifying that, in order to observe a significant influence of mergers and acquisitions on the firm size distribution, more extensive datasets would have been required. Our approach is very flexible and can be extended to account for other sources of external growth, thus contributing towards a holistic understanding of the distribution of firm sizes