Evaluating Mergers in the Presence of Dynamic Competition Using Impacts on Rivals

We present evidence that event studies can help antitrust agencies forecast impacts of mergers on innovation. In large pharmaceutical mergers, cumulative abnormal returns on portfolios of rivals predict postmerger changes in the combined firm's research and development (R&D) intensity. More favorable impacts on rivals are associated with lower intensities, which is consistent with softening competition. Matching merging firms to similar nonmerging firms suggests that we can attribute the changes in R&D intensity to the mergers. We highlight the importance of deducting expenses associated with in-process R&D and provide guidance on how to define rivals, construct portfolios, and use event studies in merger evaluations.