Changes in Corporate Focus, Ownership Structure, and Long-Run Merger Returns

Abstract:     
This study examines the impact of the degree of merger-related change in corporate focus on the long-run return to investors in mergers and acquisitions executed since 1977. Using a sample of 204 completed acquisitions, selected to be free of post-merger contaminating events, and a continuous measure of merger-related change in corporate focus, we find that long-run returns are strongly positively related to the change in focus. On average, focus-decreasing mergers result in over a 25% relative loss in stockholder wealth by the third post-merger year, and every 10% decrease in focus results in a 9% loss in stockholder wealth. We also find that entering entirely new lines of business is the most detrimental action for acquiring firm shareholders ? resulting in a relative wealth loss of 31% by the third post-merger year. We examine managers? incentives to pursue diversification and find that acquirers with low levels of managerial ownership appear more likely to pursue focus-decreasing activities financed with stock than are their counterparts with higher managerial ownership levels. Our results are robust across payment method, attitude of target management, and acquirers? pre-merger book-to-market ratio.

JEL Classifications: G14, G34

Working Paper Series