We examine firms’ strategic incentives to engage in horizontal mergers. In a real options framework, we show that strategic considerations may explain abnormally high takeover activity during periods of positive and negative demand shocks. Importantly, this pattern emerges solely as a result of firms’ strategic interaction in output markets. We show that the U-shaped relation between the state of demand and the propensity of firms to merge, documented in past studies, is driven by horizontal mergers in industries that are: (1) relatively more concentrated, (2) characterized by relatively strong competitive interaction among firms, and (3) characterized by relatively low merger-related operating synergies and restructuring costs. The empirical evidence, based on parametric and semi-parametric regression analyses, is consistent with these predictions.

We propose a model that examines the optimal size of venture capital and private equity fund portfolios. The relationship between a VC and entrepreneurs is characterized by double-sided moral hazard, which causes the VC to trade off larger portfolios against lower values of portfolio companies. We analyze the structural relations between the VC's optimal portfolio structure and entrepreneurs' and VC's productivities, their disutilities of effort, the value of a successful project, and the required initial investment in a venture. We also test the model's predictions using a small proprietary dataset collected through a survey targeted to VC and private equity funds worldwide.

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Information production associated with derivatives markets is not a sideshow; rather, it has significantly positive spillover effects on an array of corporate decisions of underlying firms. Using a regression-discontinuity design based on exogenous variation in options availability as an instrument for changes in the information environment, we show that options introductions have causal effects on corporate policies on both sides of the balance sheet. Through improved information efficiency, options availability reduces the need for debt and payout, increases efficient investment, and yields superior innovation. We conduct two independent experiments demonstrating that our instrument’s impact is not derived from alternative channels.