What drives merger behavior of firms? Strategic momentum versus bandwagons
International Journal of Organization Theory & Behavior
ISSN: 1093-4537
Article publication date: 1 March 2000
Abstract
Mergers represent a common means of restructuring assets. The existing literature on mergers, however, has a strong bias towards viewing firms' decisions as outcomes of comprehensively rational processes. In this study, we propose two alternative explanations regarding mergers, namely strategic momentum and bandwagons. Both these explanations incorporate factors such as incomplete information, cognitive simplifications by managers and principal-agent issues. Bandwagon theories argue that firms will tend to imitate their close rivals regardless of whether such imitation is value-enhancing or not. Strategic momentum theory argues that firms tend to continue with strategies they have implemented in the past. Based on an exhaustive sample of acquisitions, domestic as well as international, undertaken by 43 large pharmaceutical firms based in the triad region over a period of 15 years, we find robust support for the bandwagons Mergers represent a common means of restructuring assets. The existing literature on mergers, however, has a strong bias towards viewing firms' decisions as outcomes of comprehensively rational processes. In this study, we propose two alternative explanations regarding mergers, namely strategic momentum and bandwagons. Both these explanations incorporate factors such as incomplete information, cognitive simplifications by managers and principal-agent issues. Bandwagon theories argue that firms will tend to imitate their close rivals regardless of whether such imitation is value-enhancing or not. Strategic momentum theory argues that firms tend to continue with strategies they have implemented in the past. Based on an exhaustive sample of acquisitions, domestic as well as international, undertaken by 43 large pharmaceutical firms based in the triad region over a period of 15 years, we find robust support for the bandwagons explanation. We do not find unequivocal support for the strategic momentum explanation.
Citation
Pangarkar, N. (2000), "What drives merger behavior of firms? Strategic momentum versus bandwagons", International Journal of Organization Theory & Behavior, Vol. 3 No. 1/2, pp. 37-72. https://doi.org/10.1108/IJOTB-03-01-02-2000-B002
Publisher
:Emerald Publishing Limited
Copyright © 2000 by Marcel Dekker, Inc.