Corporate Acquisitions, Diversification, and the Firm’s Lifecycle
Charles A. Dice Center Working Paper No. 2011-18
46 Pages Posted: 23 Sep 2011 Last revised: 5 Sep 2013
Date Written: September 3, 2013
Theories of corporate finance predict that young firms make acquisitions to exploit growth opportunities, while mature firms do so because they lack growth opportunities. Further, mature firms are more likely to make wealth-destroying diversifying acquisitions because of agency problems. Contrary to these theories, we find that, while across IPO cohorts young and mature firms acquire more than middle-aged firms, young and mature firms acquire for similar reasons. Firms with better growth opportunities and performance are more likely to make acquisitions irrespective of their lifecycle stage. Moreover, both young and mature firms have similar propensities to make diversifying acquisitions. The market’s reaction to acquisition announcements enables us to reject the hypothesis that managers of mature firms are more likely to make value-destroying acquisitions than managers of young firms.
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