This paper studies the announcement returns from 4,764 mergers over the last 57 years in order to shed light on the causes of corporate diversification. One prominent view is that diversification is value destroying, either because of agency problems or internal investment distortions, but we find that combined (acquirer + target) announcement returns were significantly positive for diversifying mergers throughout the period, and no lower than the returns to related mergers. We find that returns to diversifying acquisitions declined after the 1970s, and that investors rewarded mergers involving financially constrained firms before but not after 1980, consistent with the view that the value of internal capital markets declined after the conglomerate merger wave.


Corporation and Enterprise Law | Economics | Organizations

Date of this Version

January 2008