A Note on Mergers and Risk

• Author: Harold Bierman,Joseph L. Thomas
• Published date: 01 September 1974
• Date: 01 September 1974
• DOI: http://doi.org/10.1177/0003603X7401900302
• Subject Matter: Article

A NOTE ON

MERGERS

AND

RISK

by

HAROLD

BIERMAN,

JR. and

JOSEPH

L.

THOMAS-

Recent articles in prestigious economic and finance

journals have made misleading statements on how the merg-

ing of two business firms may affect risk, where the results

of the firms' operations are economically and statistically

independent of each other. Independence is assumed in order

to eliminate situations where there is increased efficiency,

monopoly control, or where the results of operations

are

sufficiently negatively correlated

that

a reduction in risk

may be easily shown. We will show

that

independence does

not always lead to a reduction in risk

after

a merger, even

when the probability distributions of outcomes of the indi-

vidual firms are identical and independent.

MERGERS

AND

DEBT

CAPACITY:

THE

NATURE

OF

RISK

Dennis C. Mueller in a Quarterly Journal of Economics

article states that, "Even when Aand B

are

technically

unrelated, the risks surrounding their earnings streams will

be reduced when these earnings streams

are

pooled." 1Essen-

tially the same point is made by John Lintner in The Amer-

ican Economic Review when he states

that

"all risk-averse

investors will prefer amixture of two imperfectly correlated

income streams to either stream separately, and company

mergers produce such a mixture."

1II

In

addition, Lintner states

- Professors, Graduate School of Business

and

Public Adminis-

tration, Cornell University.

JD. C. Mueller, "A Theory of Conglomerate Mergers," The

Quarterly Journal of Economics, November 1969, p.

652.

IJohn Lintner, "Expectations, Mergers,

and

Equilibrium in

Purely Competitive Securities Markets," The American Economic

Ret,iew, May 1971, pp.

107-108.

523