The Value of Corporate Diversification: Evidence from Post-Merger Performance in Japan

33 Pages Posted: 28 Oct 2002

See all articles by Timothy A. Kruse

Timothy A. Kruse

Xavier University - Department of Finance

Hun Y. Park

University of Illinois at Urbana-Champaign - Department of Finance

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business

Kazunori Suzuki

Waseda University, Graduate School of Business and Finance

Date Written: March 11, 2002

Abstract

The choice between specialization and diversification in corporate business activity has become the center of large body of corporate finance literature in recent years. U.S. empirical evidence on the effects of diversification after merger is mixed, suggesting that the diversification benefits of mergers change over time. This is the first paper to examine the long-term operating performance following mergers of manufacturing firms traded on the Tokyo Stock Exchange for the period from 1969 to 1992. Using a unique data set that includes the pre-merger performance of the target and acquirer firms, we find that the long-term operating performance following the mergers is positive but insignificant. However, the long-term performance is significantly greater following diversifying mergers, and there is a remarkable degree of consistency between the pre-merger and post-merger performance. Our results are consistent with the view by Hubbard and Palia (1999) who examine the mergers occurring in the U.S. during the 1960s, and find positive abnormal returns in bidder firms of diversifying mergers. Finally, we show that rescue mergers involving distressed targets are not likely to lead to inferior long-term performance contrary to the notion that acquisitions of poorly performing firms are less likely to succeed. This is a contrast to the results of Clark and Ofek (1994) who examine acquisitions of distressed targets in the U.S. and report that the bidders are not successful in restructuring the target firms.

Suggested Citation

Kruse, Timothy A. and Park, Hun Y. and Park, Kwangwoo and Suzuki, Kazunori (Icko), The Value of Corporate Diversification: Evidence from Post-Merger Performance in Japan (March 11, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=344560 or http://dx.doi.org/10.2139/ssrn.344560

Timothy A. Kruse (Contact Author)

Xavier University - Department of Finance ( email )

United States

Hun Y. Park

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Urbana, IL 61820
United States
217-333-0659 (Phone)
217-244-3102 (Fax)

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

Kazunori (Icko) Suzuki

Waseda University, Graduate School of Business and Finance ( email )

6-1, Nishi-Waseda 1 chome,
Shinjuku-ku
TOKYO, TOKYO 169-8050
Japan
+81 3-5286-8411 (Phone)

HOME PAGE: http://www.waseda.jp/fcom/wbs/

Register to save articles to
your library

Register

Paper statistics

Downloads
884
Abstract Views
3,299
rank
25,886
PlumX Metrics