An Empirical Test of Optimal Diversification Theories

Corporate diversification as a corporate strategy has produced inconsistent results for both acquirer and target firms. In the following paper, I study announcement returns from 1,291 diversifying mergers spanning a time period of 57 years from 1950 to 2006 in order to determine what firm and deal characteristics lead to positive combined abnormal returns (CARs). By using an extensive dataset provided by Akbulut and Matsusaka (2010) and a relevant market value information from the Center for Research and Security Practices (CRSP), I find that declining acquirer value is associated with higher combined abnormal returns, while large acquirer size is associated with lower combined abnormal returns