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50+ Years of Diversification Announcements
Author(s) -
Akbulut Mehmet E.,
Matsusaka John G.
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00245.x
Subject(s) - diversification (marketing strategy) , mergers and acquisitions , monetary economics , business , capital market , agency (philosophy) , economics , financial economics , financial system , finance , marketing , philosophy , epistemology
This paper studies announcement returns from 4,764 mergers over 57 years to shed light on several controversies concerning corporate diversification. One prominent view is that diversification destroys value because of agency problems or internal investment distortions, but we find that combined (acquirer plus target) announcement returns are significantly positive for diversifying mergers throughout the period, and no lower than the returns for related mergers. The returns from diversifying acquisitions fell after 1980, and investors rewarded mergers involving financially constrained firms before but not after 1980, consistent with the idea that the value of internal capital markets declined over time.