The Market for Mergers and the Boundaries of the Firm

Mergers redraw the boundaries of the firm. In this paper, we relate incomplete contracts to empirical regularities in the market for mergers and acquisitions. We first show that high market-to-book acquirers typically do not purchase low market-to-book targets. Instead, mergers pair together firms with similar ratios. We then build a continuous-time model of investment and merger activity combining search, scarcity, and complementarity to explain this result. In the model, the 'like buys like' finding emerges from the fact that under property rights theory of the firm complementary assets should be placed under common control. We test the model by relating like-buys-like to search frictions. Search frictions and assortative matching vary inversely, supporting the model over standard explanations