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Were the Acquisitive Conglomerates Inefficient?

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Author Info

  • Peter G. Klein

    (University of Georgia)

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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File URL: http://128.118.178.162/eps/io/papers/9711/9711001.pdf
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Bibliographic Info

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

Note: Type of Document - PDF; prepared on IBM PC ; to print on HP;
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Web page: http://128.118.178.162

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Keywords: diversification; mergers and acquisitions; conglomerates; restructuring;

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Citations

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Cited by:
  1. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2012. "Corporate Diversification and Firm Value: A Survey of Recent Literature," Cologne Graduate School Working Paper Series 03-01, Cologne Graduate School in Management, Economics and Social Sciences.
  2. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
  3. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
  4. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2013. "Corporate diversification and firm value: a survey of recent literature," Financial Markets and Portfolio Management, Springer, vol. 27(2), pages 187-215, June.
  5. Killian J. McCarthy & G.U. Weitzel, 2009. "Theory and evidence on mergers and acquisitions by small and medium enterprises," Working Papers 09-21, Utrecht School of Economics.

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