The Microeconomic Consequences of Corporate Mergers: A Comment

In a recent article in this Journal,' Lev and Mandelker (hereafter referred to as LM) attempt to show the effect of a corporate merger upon various aspects of a firm's performance by using a paired-sample technique, pairing merging firms with control firms that are nonmerging but of about the same size and within the same industry. They then compare the differences of premerger and postmerger performance between the control and merging firm. Following LM, let Xim equal the premerger 5-year average of a specific performance measure for the merging firm and X2m equal the postmerger 5-year average. Let A. = X2m Xi.m Similar averages are calculated for the control firms, using the same year of merger, and the comparison statistic used in the analysis is the difference, D = Dm D,. Among other things, LM find that the D for market rate of return is positive but insignificant, that the D for the accounting measure of profitability is positive and significant, and that the D for the growth rate is negative and significant. They conclude that a particular merger appears to have little effect upon the firm's performance.