When do Buyers and Targets Draw on Related Resources? A Test of Between-firm Measures of Industry Relatedness in Acquisitions

Abstract:     
The received view is that related acquisitions have more potential to create value than unrelated acquisitions. However, there are very few measures of relatedness between two firms. Existing measures are very crude relative to those used in diversification research (e.g., diversity of a single firm's portfolio). In addition, they do not reflect recent advances in resource-based theory. Relatedness is critical in acquisitions because it may indicate asymmetric information as well as buyer objectives. These, in turn, are factors that investors may respond to when an offer is announced. We develop and test between-firm relatedness measures based on products, technology, and human expertise. While all measures had some predictive validity, the expertise measure was slightly better at predicting investor response.

JEL Classifications: G34, G12, G14

Working Paper Series