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Were the Acquisitive Conglomerates Inefficient?

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Author Info
Peter G. Klein (University of Georgia)

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Abstract

This paper challenges the conventional wisdom that the 1960s conglomerates were inefficient. I offer valuation results consistent with recent event-study evidence that markets typically rewarded diversifying acquisitions. Using new data, I compute industry-adjusted valuation, profitability, leverage, and investment ratios for thirty-six large, acquisitive conglomerates from 1966 to 1974. During the early 1970s, the conglomerates were less valuable and less profitable than standalone firms, favoring an agency explanation for unrelated diversification. In the 1960s, however, conglomerates were not valued at a discount. Evidence from acquisition histories suggests that conglomerate diversification may have added value by creating internal capital markets.

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Paper provided by EconWPA in its series Industrial Organization with number 9711001.

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Date of creation: 12 Nov 1997
Date of revision: 04 Feb 2002
Handle: RePEc:wpa:wuwpio:9711001

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Web page: http://129.3.20.41

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Related research
Keywords: diversification mergers and acquisitions conglomerates restructuring

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Find related papers by JEL classification:
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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