The Waning of Corporate Diversification

This paper studies announcement returns in a sample of 3,667 mergers over the last 55 years in order to shed light on the causes of the waning of corporate diversification. The abnormal combined (acquirer + target) return from diversifying mergers declined over time, consistent with the idea that diversification fell from favor in the 1980s. The market rewarded mergers involving financially constrained firms before but not after 1980, consistent with a declining value of internal capital markets. Announcement returns changed less for large firms than small firms, suggesting antitrust was not a key factor. Diversifying mergers earned positive combined returns throughout the period, and bidder returns were nonnegative before 1980, suggesting diversification was not a value destroying outgrowth of agency problems