Thresholds and Tides: Modeling Merger Waves as Endogenous Responses to Economic Shocks

This paper develops a predictive model of merger waves, offering a novel threshold-based framework that explains not only why waves occur but also how the next wave can be anticipated. Unlike prior studies that document merger cycles retrospectively, our approach integrates a classical Cobb–Douglas production function with shock dynamics to derive a measurable threshold θ ^* . When external economic shocks—defined by their intensity (σ) and persistence (ρ)—push the system beyond this critical point, isolated mergers give way to coordinated waves of acquisitions. This mechanism is operationalized through a dynamic response function and tested via simulations that replicate the size, duration, and timing of historical merger waves. The contribution is twofold. First, we demonstrate that merger waves are not random or purely descriptive phenomena but systematic responses to measurable production shocks. Second, and more importantly, we show that the threshold θ ^* is directly estimable using standard econometric tools and widely available datasets. While we leave the empirical validation to future work, the framework is deliberately constructed so that an empiricist can test it with relative ease, linking observable shocks to wave initiation and duration. This practical testability makes the model not only a theoretical advance but also a predictive tool of immediate use to empirical scholars and policymakers seeking to anticipate the conditions under which the next merger wave will arise.