Publication Date

April 2012

Advisor(s)

Abigail Hornstein

Major

Economics (ECON)

Language

English (United States)

Abstract

Firms have many corporate strategies, one of which is to diversify their operations through a merger or acquisition (M&A). The hope is that by diversifying, firms will gain value through operational and financial synergies, increase market power, decrease competition, and align managerial incentives. However, past studies found that firms experience a phenomenon called the “diversification discount,” where firm value may decrease. This thesis will further explore this by utilizing two models: an excess returns model testing for the discount and a probit model testing for how likely firms will diversify. The results indicate that previously diversified firms are more likely to pursue further diversifying activities, but less likely to pursue similar targets. The results also do not find a discount associated with diversifying activities, but a premium associated smaller transactions. This suggests that while diversification is necessary to explain firm value, it is not sufficient.

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