What Do We Know About Cross-subsidization? Evidence from Merging Firms

Advances in Economic Analysis & Policy, 2004, vol. 4, issue 1, pages 1218-1218

Abstract: A substantial empirical literature documents value-destroying "cross-subsidization" among the divisions of diversified firms. However, this literature relies upon two maintained hypotheses: that divisions of diversified firms are randomly allocated to their corporate parents and that the investment opportunities facing conglomerate divisions are identical to those of stand-alone firms in their industries. I examine the investment behavior prior to merger of a sample of firms that undertook diversifying mergers between 1980 and 1995. I show that, in my sample, investment patterns that the literature has attributed to cross-subsidization between divisions are apparent in the pairs of merging firms prior to their mergers. Thus, some of the cross-subsidization results in the literature may be attributable to selection bias. I also examine stock market responses to announcements of diversifying acquisitions. The event responses are largely independent of measures of the extent to which the merger is diversifying.

Keywords: diversification; investment (search for similar items in EconPapers)
JEL-codes: G31 (search for similar items in EconPapers)
Date: 2004
Note: oai:bepress:bejeap-1218
View list of references View citations in EconPapers

Downloads: (external link)
http://www.bepress.com/cgi/viewcontent.cgi?article=1218&context=bejeap (application/pdf)
Subscription to the journal may be required to access full texts.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This journal article can be ordered from
http://www.bepress.com/subscriptions.html

Access Statistics for this article

More articles in Advances in Economic Analysis & Policy from Berkeley Electronic Press
Series data maintained by Christopher F. Baum ().