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

53 Pages Posted: 29 Jan 2001

See all articles by Angela Morgan

Angela Morgan

Clemson University - Department of Finance

Lance A. Nail

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods

William L. Megginson

University of Oklahoma

Date Written: October 2000

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 Classification: G14, G34

Suggested Citation

Morgan, Angela and Nail, Lance A. and Megginson, William L., Changes in Corporate Focus, Ownership Structure, and Long-Run Merger Returns (October 2000). Available at SSRN: https://ssrn.com/abstract=250993 or http://dx.doi.org/10.2139/ssrn.250993

Angela Morgan

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States
(864) 656-2249 (Phone)
(864) 656-3748 (Fax)

Lance A. Nail (Contact Author)

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods ( email )

Birmingham, AL 35294
United States
205-934-8501 (Phone)
205.975.4427 (Fax)

William L. Megginson

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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