50+ Years of Diversification Announcements


  • We thank Oguzhan Ozbas, Richard Roll, anonymous referees, and workshop participants at USC and California Corporate Finance Conference for helpful suggestions, USC and California State University Fullerton for financial support and Heng (Rebecca) Un Sou for excellent research assistance.

Corresponding author: Department of Finance, Mihaylo College of Business and Economics, SGMH-5194, California State University Fullerton, Fullerton, CA 92834; Phone: (657) 278-8259; Fax: (657) 278-2161; E-mail: makbulut@fullerton.edu.


This paper studies announcement returns from 4,764 mergers over 57 years to shed light on several controversies concerning corporate diversification. One prominent view is that diversification destroys value because of agency problems or internal investment distortions, but we find that combined (acquirer plus target) announcement returns are significantly positive for diversifying mergers throughout the period, and no lower than the returns for related mergers. The returns from diversifying acquisitions fell after 1980, and investors rewarded mergers involving financially constrained firms before but not after 1980, consistent with the idea that the value of internal capital markets declined over time.