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The Indirect Effects of Changes in Industry Concentration

2009; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.1363864

1556-5068

Mary J Becker, Shawn Thomas,

Economic Growth and Productivity

We investigate the timing, magnitude, and direction of the relation between changes in industry concentration across vertically related industries over the period 1978-2006. We document that changes in customer industry concentration are positively related to subsequent changes in supplier industry concentration consistent with changes in customer industry concentration prompting changes in supplier industry concentration. We find evidence that increased concentration in customer and supplier industries, perhaps reflecting countervailing power motives for horizontal mergers and acquisitions, explain in part the observed positive relation; however, we also find robust evidence that decreases in concentration in vertically related industries are also important determinants of the observed relation. Our results have implications for those papers that examine the association between the level of industry concentration and important corporate finance policy choices. For instance, our results complement the merger wave literature by indicating that changes in concentration in up or downstream industries are important factors in own industry changes in concentration even outside periods of extreme merger and acquisition activity. Additionally, our results suggest that the indirect effects of entry are also significant which could be used to motivate new research on this topic in the venture capital and IPO literatures. Our results also have implications for those papers that examine the association between the level of industry concentration and important corporate finance policy choices, e.g., capital structure decisions (Kale and Shahrur (2007)), payout policy (Massa, Rehman, and Vermaelen (2007) and Grullon and Michaely (2007)), and corporate governance (Aggrawal and Samwick (1999) and Giroud and Mueller (2007)). To the extent that these papers find that the level of concentration in an industry influences corporate decision-making, it seems reasonable to expect that changes in concentration (perhaps brought about as an indirect effect of a change in concentration in an up or downstream industry) should also play an important role in corporate decision-making. The results of this paper contribute to this literature by increasing our understanding of what factors prompt changes in industry concentration and, thus, how these factors might also be expected to impact corporate policy choices through their effect on concentration levels.