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Does Corporate Diversification Destroy Value?
Author(s) -
Graham John R.,
Lemmon Michael L.,
Wolf Jack G.
Publication year - 2002
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 - 10.1111/1540-6261.00439
Subject(s) - diversification (marketing strategy) , value (mathematics) , sample (material) , event study , business , market value , value creation , industrial organization , economics , monetary economics , accounting , marketing , statistics , mathematics , paleontology , chemistry , context (archaeology) , chromatography , biology
We analyze several hundred firms that expand via acquisition and/or increase their number of business segments. The combined market reaction to acquisition announcements is positive but acquiring firm excess values decline after the diversifying event. Much of the excess value reduction occurs because our sample firms acquire already discounted business units, and not because diversifying destroys value. This implies that the standard assumption that conglomerate divisions can be benchmarked to typical stand‐alone firms should be carefully reconsidered. We also show that excess value does not decline when firms increase their number of business segments because of pure reporting changes.