A Reexamination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View

Authors

  • R. Glenn Hubbard,

    1. Graduate School of Business, Columbia University, NBER
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  • Darius Palia

    1. NBER
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    • *

      Hubbard is at the Graduate School of Business, Columbia University and NBER; Palia is at the Graduate School of Business, Columbia University. We are grateful to two anonymous referees, and to Larry Glosten, Ken Lehn, Gershon Mandelkar, Gordon Phillips, David Scharf-stein, Henri Servaes, René Stulz (the editor), Cliff Smith, Jeremy Stein, Jake Thomas, and seminar participants at the Western Finance Association meetings at Sunriver, Columbia, Dartmouth, and Pittsburgh for helpful comments and discussions. We also thank Carlene Palia, Kirk Tanaguchi, Meng Tan, and Xiao Zhang for their research assistance. Palia acknowledges financial support from the faculty Research Fund of the Graduate School of Business, Columbia University. All errors remain our responsibility.


Abstract

One possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less-developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially “unconstrained” buyers acquire “constrained” targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided company-specific operational information, while the bidder provided capital-budgeting expertise.

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