How should a researcher estimate the treatment effect of an acquisition on firm performance?  The question is challenging because establishing a good counterfactual is particularly difficult in this setting. Although one might be able to find a good comparison unit for the pre-merger period, post-transaction the new firm is fundamentally different from what the actual merging firms were before. We propose and apply a novel methodology allowing us to estimate the treatment effect within a causal framework. Consistent with extant literature, we find weak evidence suggesting post-merger improvements in operating performance. By decomposing ROA into its two components, the Lerner index and asset utilization, we discover the reason for the identified mixed results.  While the Lerner index increases, asset utilization falls. These findings, combined, suggest that, on average, merging firms are increasing their markups and profit margins at the expense of operational efficiency, ultimately subsidizing inefficiency by exploiting their increased market power.

Coauthored with Gustavo Grullon (Rice University) and Alex Butler (Rice University)