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The Timing and Terms of Mergers for Organically Growing Firms

We study how competitive firms accumulate capital and undertake a productivityraising merger. We derive optimal investment and acquisition policies for standalone firms and with a merger option. Industry development generally involves an initial phase of catch-up growth to reach a long-run expansion path. On the long-run path highly capitalized firms wait to merge their current assets before pursuing further growth, whereas undercapitalized firms grow their assets first and merge at a higher threshold. If decisions are decentralized and firms commit to future deal terms, relative productivity-based shares induce efficient investment and merger decisions.