Business cycle and aggregate industry mergers

This paper tests the relationship between industry-level mergers and business cycle using panel tests that allow us to control for macro-economic and industry-level determinants of merger activity. We find robust evidence that both related and unrelated industry-level mergers are pro-cyclical. However, the evidence is asymmetric between related and unrelated mergers. We also find strong evidence in support of two major theories of merger activity that have been proposed and tested in the existing literature, namely, neoclassical theory and behavioral theory. The proxies of both neoclassical and behavioral theories explain merger activity in general; however, the pro-cyclicality of mergers is not fully captured by any of these proxies, individually or collectively.