Patterns of abnormal returns and the competitive effects of horizontal mergers

This paper examines the abnormal stock returns of rivals of firms undertaking horizontal mergers that were challenged by the FTC over the period 1981–1987. At the time of merger announcements, the rivals earn positive abnormal return on average; at the time of the antitrust complaints, the rivals earn normal returns. Past studies have argued that this specific pattern of abnormal returns necessarily indicates that mergers could not have reduced competition. This paper finds that this pattern of abnormal returns is a result of the different effects of antitrust complaints on smaller and larger rivals. The evidence suggests that the mergers may have created efficiencies, but the pattern of abnormal returns is not inconsistent with mergers that may also have resulted in higher product prices.