The Effects of Conglomerate Merger Activity on Systematic Risk

Michael D. Joehnk and James F. Nielsen

Journal of Financial and Quantitative Analysis, 1974, vol. 9, issue 2, 215-225

Abstract: The study initially examined the immediate effects that conglomerate acquisitions have on the beta level of conglomerate and nonconglomerate acquiring firms. An analysis was then made of the long-run beta trends of firms that actively engage in conglomerate mergers. The results of the short-term comparative analysis have indicated that systematic risk behavior tends to be responsive in varying degrees to major conglomerate merger activity—with betas changing as a function of the combined premerger values and ρ2 measures showing improvement upon acquisition. At the same time, the regression results clearly revealed that the responsiveness of β to premerger marketrelated variables was considerably greater for the nonconglomerate firms. In contrast, the results of the comparative long-term analysis suggested that the differential effects of conglomerate merger activity on systematic risk are more of a marginal or limited nature. That is, unless the firm conducted extensive merger activity, the long-run performance of β and ρ2 indicated that conglomerate mergers have only contributed to increased absolute and relative systematic risk levels—the same pattern exhibited by the nonconglomerate, nonmerging sample.

Date: 1974
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