Diversification to Mitigate Expropriation in the Tobacco Industry

Posted: 12 Sep 2007

See all articles by Messod Daniel Beneish

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting

Ivo Ph. Jansen

Rutgers University

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

Nathan V. Stuart

University of Wisconsin Oshkosh

Abstract

While it is well-established that diversifying acquisitions by large cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show wealth creation increases in (1) the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms' influence in more political districts), and (2) the liquidity of tobacco firms' assets (converting cash to harder-to-expropriate operating assets). We also predict and find that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.

Keywords: Tobacco, Acquisitions, Diversification, Expropriation Costs

JEL Classification: G34, K00, L66, M41

Suggested Citation

Beneish, Messod Daniel and Jansen, Ivo Ph. and Lewis-Western, Melissa Fay and Stuart, Nathan V., Diversification to Mitigate Expropriation in the Tobacco Industry. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1012118

Messod Daniel Beneish (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Ivo Ph. Jansen

Rutgers University ( email )

227 Penn. St
Camden, NJ 08102
United States
856-225-6696 (Phone)

Melissa Fay Lewis-Western

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

Nathan V. Stuart

University of Wisconsin Oshkosh ( email )

College of Business
800 Algoma Boulevard
Oshkosh, WI 54904
United States
920-424-3472 (Phone)
920-424-7413 (Fax)

HOME PAGE: http://www.uwosh.edu/cob/faculty-and-staff/faculty/individual-pages/nathan-stuart

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