Bustup Takeover of Value-Destroying Diversified Firms

34 Pages Posted: 11 Nov 2008

See all articles by Peter Berger

Peter Berger

University of Pennsylvania - The Wharton School

Eli Ofek

New York University (NYU) - Department of Finance

Date Written: October 1994

Abstract

Berger and Ofek (1995) confirm recent evidence by Lang and Stulz (1994) of a value loss from diversification in the 1980s, and use segment-level data to estimate the magnitude of the loss. They find that, during 1986-1991, the average diversified firm destroyed about 15% of the value its lines of business would have had if operated as stand-alone businesses. The evidence that diversification represented a suboptimal managerial strategy suggests that internal control systems do not prevent managers from destroying significant amounts of value. The value destruction does, however, generate large profit opportunities for outsiders. The natural question that arises is thus whether these profit opportunities results in takeovers disciplining the managements of firms with large and persistent value losses from diversification.

Suggested Citation

Berger, Peter and Ofek, Eli, Bustup Takeover of Value-Destroying Diversified Firms (October 1994). NYU Working Paper No. FIN-94-015, Available at SSRN: https://ssrn.com/abstract=1298830

Peter Berger

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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