Getting a Better Price: Strategic Behaviour before Changes in Ownership of Corporate Assets

Abstract

We propose a model of investments prior to corporate ownership changes. We derive conditions under which the selling of a firm triggers overinvestment by both the seller and the buyer prior to the asset transfer. In a setting with Cournot competition, we show that these incentives can drive the consumer prices in a post-acquisition duopoly below those of an ongoing triopoly. Our analysis warns against a mechanical use of pre-merger benchmarks in ex post merger evaluations.Mergers & Acquisitions; Ownership; Auctions; Strategic Investments; Merger Evaluations