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Is More Less? Propensity to diversify via M&A and market reactions

Listed author(s):
  • Abigail S. Hornstein

    ()

    (Department of Economics, Wesleyan University)

  • Zachary Nguyen

    (Charles River Associates)

Mergers and acquisitions (M&As) could lead to a firm diversifying into new industries, and the impact of this may be related to the firm's prior diversification. Using a panel of 1030 M&A transactions from 2000 to 2010, we find that previously diversified firms are more likely to pursue industrially diversifying M&As. Both previous and contemporary diversification measures are not associated with the firm's cumulative abnormal returns (CARs) at time of announcement but have a lasting effect on various performance measures up to two years later. We find evidence supporting both a diversification discount and premium, which can be predicted by the sign of the CAR at the time of announcement. This suggests that while diversification is necessary to explain firm value, it is not sufficient.

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File URL: http://repec.wesleyan.edu/pdf/ahornstein/2014002_hornstein.pdf
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Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2014-002.

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Length: 44 pages
Date of creation: Mar 2014
Publication status: Published in International Review of Financial Analysis, 34, 76-88
Handle: RePEc:wes:weswpa:2014-002
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