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In this paper we re-examine the predicted wealth effects for the stockholders and bondholders involved in conglomerate mergers. Seminal studies in finance offer several hypotheses about the valuation consequences of corporate diversification and firm performance. Recent empirical studies document the negative relationship between corporate diversification and firm performance. We evaluate the predictive accuracy of these earlier theories given these more recent empirical results. Our results indicate that the wealth predictions of neither the wealth creation theory of Lewellen (1971) nor the wealth redistribution theories of Higgins and Schall (1975) or Galai and Masulis (1976) hold for bondholders and stockholders in whole. Bondholder wealth changes are virtually independent of stockholder wealth changes in conglomerate mergers in the 1970s and 1980s. However, a significantly negative relationship exists between stockholder and bondholder wealth changes in conglomerate mergers occurring in the 1990s. Conglomerate mergers did not result in significant stock or bond wealth creation in any of the three decades studied. Over the last decade, capital markets have penalized the stockholders in conglomerate mergers with significant wealth losses. Bondholder wealth changes are insignificantly positive, resulting in significant net wealth losses for conglomerate mergers in the

Intersecurity wealth redistribution in conglomerate mergers: A re-examination over three decades