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50+ Years of Diversification Announcements

Author

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  • Mehmet E. Akbulut
  • John G. Matsusaka

Abstract

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.

Suggested Citation

  • Mehmet E. Akbulut & John G. Matsusaka, 2010. "50+ Years of Diversification Announcements," The Financial Review, Eastern Finance Association, vol. 45(2), pages 231-262, May.
    • Handle: RePEc:bla:finrev:v:45:y:2010:i:2:p:231-262
    DOI: 10.1111/j.1540-6288.2010.00245.x
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    Cited by:

    1. Veronika Vinogradova, 2018. "Value creation through external growth strategy: the architecture of successful performance," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 847-882, October.
    2. Reinhard Meckl & Falk Röhrle, 2016. "Do M&A deals create or destroy value? A meta-analysis," European Journal of Business and Economics, Central Bohemia University, vol. 11(2), pages 8901:11-890, June.
    3. Parama Barai & Pitabas Mohanty, 2014. "Role of industry relatedness in performance of Indian acquirers—Long and short run effects," Asia Pacific Journal of Management, Springer, vol. 31(4), pages 1045-1073, December.
    4. Reddy, Kotapati Srinivasa, 2015. "Determinants of Cross-border Mergers and Acquisitions: A Comprehensive Review and Future Direction," MPRA Paper 63969, University Library of Munich, Germany, revised 2015.
    5. Boyan Jovanovic & Serguey Braguinsky, 2004. "Bidder Discounts and Target Premia in Takeovers," American Economic Review, American Economic Association, vol. 94(1), pages 46-56, March.
    6. Ibrahim Yousef, 2020. "When Good Things Turn Bad: Evidence from G-7 Serial Acquirer Bidding," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 16(2), pages 145-177.
    7. Ueda, Masako & Frantzeskakis, Kyriakos, 2007. "A Dynamic Equilibrium Model of Firm's Life Cycle and Mergers as Efficient Reallocation," CEPR Discussion Papers 6079, C.E.P.R. Discussion Papers.
    8. Umar Farooq & Muhammad Ali Jibran Qamar & Krishna Reddy, 2020. "Impact Size and Determinants of Indirect Cost of Financial Distress: Role of Receivable and Inventory Management," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 16(2), pages 179-207.
    9. Hornstein, Abigail S. & Nguyen, Zachary, 2014. "Is more less? Propensity to diversify via M&A and market reactions," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 76-88.
    10. Ulrike Malmendier & Enrico Moretti & Florian S Peters, 2018. "Winning by Losing: Evidence on the Long-run Effects of Mergers," Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 3212-3264.
    11. Mohammad Zarei & Amir Alambeigi & Parvaneh Karimi & Behrouz Zarei, 2015. "What Drives Mergers and Acquisitions Waves in Developing Countries? Evidences from Iranian Banking Industry," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 19(2), pages 123-137, Spring.
    12. Jain, Samta & Kashiramka, Smita & Jain, P.K., 2019. "Wealth effects on cross-border acquisition firms from emerging economies," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    13. Jing Zhou & Yunwen Jiang & On Kit Tam & Wei Lan & Silin Ye, 2021. "Success in completing cross‐border acquisitions by emerging market firms: What matters?," The World Economy, Wiley Blackwell, vol. 44(7), pages 2128-2163, July.
    14. Filson, Darren & Olfati, Saman, 2014. "The impacts of Gramm–Leach–Bliley bank diversification on value and risk," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 209-221.
    15. Hoechle, Daniel & Schmid, Markus & Walter, Ingo & Yermack, David, 2012. "How much of the diversification discount can be explained by poor corporate governance?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 41-60.
    16. Barros, Victor & Verga Matos, Pedro & Miranda Sarmento, Joaquim & Rino Vieira, Pedro, 2022. "M&A activity as a driver for better ESG performance," Technological Forecasting and Social Change, Elsevier, vol. 175(C).
    17. Hilscher, Jens & Şişli-Ciamarra, Elif, 2013. "Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 140-158.
    18. Reddy, K. Srinivasa, 2015. "Institutional Laws, and Mergers and Acquisitions in India: A Review/Recommendation," MPRA Paper 63410, University Library of Munich, Germany, revised 2015.
    19. Ashrafee Tanvir Hossain & Lawrence Kryzanowski, 2021. "Political corruption shielding and corporate acquisitions," The Financial Review, Eastern Finance Association, vol. 56(1), pages 55-83, February.
    20. Carlos Castro-Iragorri, 2019. "Does the market model provide a good counterfactual for event studies in finance?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 33(1), pages 71-91, March.

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