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A Re-Examination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View

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  • R. Glenn Hubbard
  • Darius Palia

Abstract

One possible explanation that bidding firms earned 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6539.

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Date of creation: Apr 1998
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Publication status: published as Journal of Finance (June 1999).
Handle: RePEc:nbr:nberwo:6539

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  1. Andrew B. Abel & Olivier J. Blanchard, 1983. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
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  7. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 111-33, March.
  8. Sicherman, Neil W & Pettway, Richard H, 1987. " Acquisition of Divested Assets and Shareholders' Wealth," Journal of Finance, American Finance Association, American Finance Association, vol. 42(5), pages 1261-73, December.
  9. Li, David D & Li, Shan, 1996. " A Theory of Corporate Scope and Financial Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 51(2), pages 691-709, June.
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  11. Hyun-Han Shin & René M. Stulz, 1998. "Are Internal Capital Markets Efficient?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 531-552, May.
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  13. Matsusaka, John G. & Nanda, Vikram, 2002. "Internal Capital Markets and Corporate Refocusing," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 11(2), pages 176-211, April.
  14. Dodd, Peter & Warner, Jerold B., 1983. "On corporate governance : A study of proxy contests," Journal of Financial Economics, Elsevier, Elsevier, vol. 11(1-4), pages 401-438, April.
  15. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  16. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1989. "Do Managerial Objectives Drive Bad Acquisitions?," NBER Working Papers 3000, National Bureau of Economic Research, Inc.
  17. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 461-88, June.
  18. Servaes, Henri, 1996. " The Value of Diversification during the Conglomerate Merger Wave," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1201-25, September.
  19. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  20. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(1), pages 137-154, September.
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Cited by:
  1. Doukas, John A. & Kan, Ozgur B., 2008. "Investment decisions and internal capital markets: Evidence from acquisitions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(8), pages 1484-1498, August.
  2. Shin, Hyun-Han & Kim, Yong H., 2002. "Agency costs and efficiency of business capital investment: evidence from quarterly capital expenditures," Journal of Corporate Finance, Elsevier, Elsevier, vol. 8(2), pages 139-158, March.

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