Acquisitions and Foreign Competition

Abstract

I provide evidence on the impact of foreign competition on firms' propensities to engage in mergers and acquisitions. Using import tariff reductions as an exogenous shock that increases foreign industry competition, I find that affected firms are more likely to make acquisitions following a tariff reduction. Cross-sectional tests show that this association is more pronounced for single segment firms, firms that innovate less, or that are more capital intensive, which suggests this association is stronger for firms which stand to gain more from an acquisition. Moreover, the positive relationship between acquisition likelihood and tariff cuts is less pronounced for financially constrained firms and during times of low capital liquidity, which implies that it is easier for firms with greater access to external capital to respond to increases in foreign competition by making acquisitions. Finally, I find that acquisitions made subsequent to tariff decreases are associated with positive wealth gains for bidder shareholders, indicating that these acquisitions are viewed favorably by market participants.