M&As, Employee Costs and Labor Reallocation

Mergers are associated with large and persistent earnings declines for incumbent employees in target firms. Linking employer-employee administrative data with information on merger activity in Brazil, I find the negative effects are entirely concentrated on employees who exit target firms and reflect displacement in the short run and wage declines in the long run. Low-skilled, managerial, and older employees fare worse. Overall, I conclude that mergers are followed by substantial reallocation costs reflecting losses of firm-specific wage premiums, matching inefficiencies, and industry-specific human capital depreciation with employees transitioning to lower-paying firms considered to be of lower productivity and employment value.