Acquisitions, Productivity, and Profitability: Evidence from the Japanese Cotton Spinning Industry Serguey Braguinsky, Carnegie Mellon University Atsushi Ohyama, Hokkaido University Tetsuji Okazaki, University of Tokyo Chad Syverson, University of Chicago
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Acquisitions, Productivity, and Profitability: Evidence from the Japanese Cotton Spinning Industry, Chad Syverson
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Acquisitions, Productivity, and Profitability: Evidence from the Japanese Cotton
Spinning Industry
Serguey Braguinsky, Carnegie Mellon University
Atsushi Ohyama, Hokkaido University
Tetsuji Okazaki, University of Tokyo
Chad Syverson, University of Chicago
What We’re Looking At
• The allocation of activity across production units matters to aggregate productivity
• M&A can in principle reallocate control of productive assets to entities able to apply them more efficiently
• Fits nicely with idea that managers and management practices shape productivity differences across plants, firms, and even countries
What We’re Looking At
• But previous research has not been fully conclusive, partly due to several data problems
– E.g., couldn’t cleanly distinguish between physical (quantity) productivity and revenue productivity
– M&A may increase market power, leading to higher TFPR even if TFPQ is stagnant (or even falls)
– Even if productivity increases, difficult to observe the mechanism
Why We’re Looking Here
• Our data doesn’t have price-is-output problem while having lots of stuff one usually can’t observe (mechanism!)
• We can measure, e.g.:
– Profitability separately from productivity
– Production process virtually at an engineering level
– Productivity conditional on operation as well as capacity utilization (fraction of time in operation)
– Firms’ product-market outcomes, connections, and inventory-holding behavior
Why We’re Looking Here
• Our setting (Japan’s cotton spinning industry, 1890-1920) is also inherently interesting from a development point of view
– Japan isolated until forced opening in 1860s
– Cotton yarn and cloth accounted for fully one-third of imports during 1868-1875
– But soon became first world-class mfg. industry in Japan (Ohyama, Braguinsky, and Murphy, 2004)
– Domestic production surpassed imports by 1890; exporting started 1895 and surpassed imports by 1897
Data
• Decades of information on operations, management, and ownership of the universe of industry plants
– Plant output and inputs in physical units
– Output prices, inventories, and K utilization
– Firm-level accounting data
– Firms’ shareholder lists, board compositions, and business histories
• Spans critical industrialization period for Japan
• After extensive growth through 1890s, consolidation
– Better firms expanded extensively rather than intensively
• 73 acquisitions involving 95 plants during 1898-1920; 70% of industry capacity changed hands
– Firms mostly joint stock companies with easily transferrable ownership (unusual for developing economies)
– Rate of acquisitions higher than in comparable contemporaneous U.S. values
What Role Did Asset Reallocation Play?
Number of Acquired Plants by Year
Main Findings (I)
• More nuanced picture than the straightforward “higher productivity buys lower productivity” story
• Acquired firms’ production facilities were not on average any less physically productive than plants of the acquiring firms, conditional on operating
• But acquired firms much less profitable
• This profitability gap did not reflect market power differences between the firms
Future Acquiring, Acquired and Exiting Plants before Acquisitions, 1896-97
Acquiring plants Acquired plants Exiting plants
First cohort Second cohort
Physical productivity
(% diff. from average)
6.6 3.4 15.6 -21.1
Profitability
(% return on equity)
27.4 18.5 15.9 15.9
Price
(yen/400lb)
93.8 92.4 92.8 91.7
Days in operation per yr 324 316 301 279
Equipment age
(years)
5.3 5.9 2.8 11.8
Number of plants 32 33 32 24
• Profitability—levels and changes—was not about prices (the usual suspect)
• Most profitability differences before acquisition explained by input utilization
• Acquired plants’ profitability growth came from increased utilization in short run and both utilization and productivity growth in the long run
Main Findings (II)
Effects of Acquisitions, as Seen within Acquired Plants
Acquired plants, relative to 3+ years before acquisition
(% difference)
Productivity ROCE Price
1-2 years before acquisition -0.3
(1.9)
2.0
(1.3)
1.1
(1.3)
1-3 years after acquisition 4.5*
(2.6)
6.0*
(2.2)
3.6
(2.7)
4-8 years after acquisition 12.6*
(3.3)
8.9*
(2.5)
4.4
(3.4)
Observations 1,078 891 1,118
Acquired Plants Compared to Incumbent Plants of Their Acquirers
Acquired plants, relative to incumbent plants of acquirers
(% difference)
Productivity ROCE Price
Acquired plants, before
acquisition -2.5
(2.1)
-3.0*
(1.1)
-1.9
(1.4)
Acquired plants, after
acquisition
9.1*
(2.3)
4.0*
(1.4)
2.4
(1.7)
Observations 1,487 1,392 1,528
Acquired Plants Compared to Incumbent Plants of Their Acquirers
Main Findings (III)
• Profitability gap reflected systematically lower unit capital costs among acquirers
– Higher capacity utilization (lower unit K costs)
– Lower average inventory levels
• These differences arise at least in part due to acquired firms’ deficits in demand management
– Rationing occurred during times of low demand
– Stronger companies had a broader network of connections at trading houses and dealt with more reputable buyers