When Do Buyers and Targets Draw on Related Resources? A Test of Between-Firm Measures of Industry Relatedness in Acquisitions

Posted: 16 Jun 1997

See all articles by Russell Wayne Coff

Russell Wayne Coff

Wisconsin School of Business

Donald E. Hatfield

Virginia Polytechnic Institute

Date Written: July 1996

Abstract

The received view is that related acquisitions have more potential to create value than unrelated acquisitions. However, there are very few measures of relatedness between two firms. Existing measures are very crude relative to those used in diversification research (e.g., diversity of a single firm's portfolio). In addition, they do not reflect recent advances in resource-based theory. Relatedness is critical in acquisitions because it may indicate asymmetric information as well as buyer objectives. These, in turn, are factors that investors may respond to when an offer is announced. We develop and test between-firm relatedness measures based on products, technology, and human expertise. While all measures had some predictive validity, the expertise measure was slightly better at predicting investor response.

JEL Classification: G34, G12, G14

Suggested Citation

Coff, Russell Wayne and Hatfield, Donald E., When Do Buyers and Targets Draw on Related Resources? A Test of Between-Firm Measures of Industry Relatedness in Acquisitions (July 1996). Available at SSRN: https://ssrn.com/abstract=8371

Russell Wayne Coff (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

Donald E. Hatfield

Virginia Polytechnic Institute ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

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