1 Rival Reactions

Mergers and acquisitions (M&As) are major events, reshaping competition among related firms (traditionally called rivals). Despite their seeming importance, most M&A studies have found only a limited empirical impact on rival stock prices. Our paper revisits this issue using a novel approach to characterize the degree of interactions among related firms based on their stock return correlations after controlling for market and industry price movements. Our approach filters out firms that are not related and distinguishes business partners from direct competitors. The results indicate that M&A announcements are on average bad news for both business partners and direct competitors of the acquirer. This provides significant evidence that M&As reinforce an acquirer’s competitive advantage, a validation of the competitive pressure hypothesis. JEL classification: G3