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

Abigail Hornstein and Zachary Nguyen
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Zachary Nguyen: Charles River Associates

No 2014-002, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: 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.

Keywords: M&A; diversification; event study; operating performance (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-03
New Economics Papers: this item is included in nep-bec and nep-com
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Citations: View citations in EconPapers (6)

Published in International Review of Financial Analysis, 34, 76-88

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Journal Article: Is more less? Propensity to diversify via M&A and market reactions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2014-002

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