United States Department of Transportation
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The Stock Price Performance of Railroad Companies Associated with Mergers and Acquisitions
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1999-02-01
[PDF-1.86 MB]
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Abstract:This study investigates the abnormal returns of railroad merging firms and their industry counterparts around merger proposal and antitrust challenge announcements, in order to examine whether the increase in value of the merged firms emanates from the efficient gain effect or the market power gain effect. The empirical results of this study show that the stockholders of acquiring firms do not gain from mergers. In contrast, stockholders of acquired firms and industry counterparts earn significantly positive abnormal returns. These findings suggest that railroad mergers may result in gains from the exercise of greater market power. However, the acquiring firms' gain from improved operations and exercise of greater market power is limited, as hypothesized in a dominant firm model. On the other hand, the industry counterparts gain from an increase in market power and do not lose from the limited gain in merging firms' efficiency. The findings are consistent with the market power gain effect. The findings also suggest that both merging firms and their industry counterparts gained on the day the merging firms voluntarily called off the merger proposal. Furthermore, when the federal regulatory agency, the Interstate Commerce Commission (ICC), rejected a merger, both the merged firm and its industry counterparts had significantly negative abnormal returns. The empirical evidence suggests that a selective tightening of the antitrust policy governing railroad mergers may enhance consumer welfare.
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Content Notes:Supported by a grant from the U.S. Department of Transportation, University Transportation Centers Program
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