JOB MARKET PAPER Mergers and Acquisitions Accounting Can Explain the Diversi\u85cation Discount

I show that M&A accounting can explain the diversi\u85cation discount as measured with Tobins q. The typical M&A accounting procedure inates the book value of assets and creates a mechanical drop in the common measure of acquirersq. Because diversi\u85ed \u85rms are more acquisitive than standalones, their q is likely to be lower, generating a spurious diversi cation discount. After adjusting q for goodwill by excluding it from the book value of assets, I \u85nd no signi\u85cant diversi\u85cation discount in most speci\u85cations. As an alternative to the goodwill correction, I use the change in the M&A accounting rules in 2001 as a natural experiment to test my main hypothesis. Last, because goodwill is a lower bound for the di¤erence between transaction price and targets book value, I estimate the magnitude of the total adjustment on a small sample of deals and \u85nd a diversi\u85cation premium