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Corporate Acquisitions, Diversification, and the Firm's Lifecycle

Author

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  • Arikan, Asli M.

    (OH State University)

  • Stulz, Rene M.

    (OH State University)

Abstract

Lifecycle theories of mergers and diversification predict that firms make acquisitions and diversify when their internal growth opportunities become exhausted. Free cash flow theories make similar predictions. In contrast to these theories, we find that the acquisition rate of firms (defined as the number of acquisitions in an IPO cohort-year divided by the number of firms in that cohort-year) follows a u-shape through their lifecycle as public firms, with young and mature firms being equally acquisitive but more so than middle-aged firms. Firms that go public during the merger/IPO wave of the 1990s are significantly more acquisitive early in their public life than firms that go public at other times. Young public firms have a lower acquisition rate of public firms than mature firms, but the opposite is true for acquisitions of private firms and subsidiaries. Strikingly, firms diversify early in their life and there is a 41% chance that a firm's first acquisition is a diversifying acquisition. The stock market reacts more favorably to acquisitions by young firms than to acquisitions by mature firms except for acquisitions of public firms paid for with stock. There is no evidence that the market reacts more adversely to diversifying acquisitions by young firms than to other acquisitions.

Suggested Citation

  • Arikan, Asli M. & Stulz, Rene M., 2011. "Corporate Acquisitions, Diversification, and the Firm's Lifecycle," Working Paper Series 2011-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2011-18
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    References listed on IDEAS

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    Cited by:

    1. Rodrigo Pérez Artica & Leandro Brufman & Lisana Belén Martinez, 2017. "Delving into the Secular Stagnation Hypothesis: A Firm-Level Analysis of the Private Sector’s Excess Savings in Advanced Economies," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(1), pages 77-106, March.
    2. Geoffrey Tate & Liu Yang, 2015. "The Human Factor in Acquisitions: Cross-Industry Labor Mobility and Corporate Diversification," Working Papers 15-31, Center for Economic Studies, U.S. Census Bureau.

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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