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A Reexamination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View
Author(s) -
Hubbard R. Glenn,
Palia Darius
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00139
Subject(s) - business , bidding , capital market , capital (architecture) , cost of capital , monetary economics , mergers and acquisitions , industrial organization , finance , economics , microeconomics , marketing , incentive , archaeology , history
One possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less‐developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially “unconstrained” buyers acquire “constrained” targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided company‐specific operational information, while the bidder provided capital‐budgeting expertise.