Mergers and Technological Change: 1885-1998

We analyze mergers over the past century in a growth model that emphasizes technological change. We explain the positive relation between mergers and stock prices, the positive relation between internal growth of firms and their acquisitions, and the positive relation of mergers with other measures of reallocation such as entry and exit. More broadly, mergers help firms to reallocate assets more smoothly, thereby raising returns to investment and the growth rate. We also find that merger waves are shorter when technological change is more dramatic, when the capital of other firms is less costly to transfer, and when entry and exit are a smooth reallocation mechanism. This last result underscores that entry and exit on the one hand and mergers on the other are substitute means of reallocation..