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Does Corporate Diversification Destroy Value?

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Author Info

  • John R. Graham

    (Duke University,)

  • Michael L. Lemmon

    (University of Utah,)

  • Jack G. Wolf

    (Clemson University)

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    Abstract

    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. Copyright The American Finance Association 2002.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 57 (2002)
    Issue (Month): 2 (04)
    Pages: 695-720

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    Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:695-720

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