Fifty Years of Diversification Announcements

This paper studies the announcement returns to diversifying mergers from 1950 to 2002. It is widely believed that corporate diversification destroys value, but we find that combined (bidder + target) announcement returns were significantly positive for diversifying mergers throughout the period. The return from diversifying mergers fell after the 1970s, consistent with the view that investors soured on diversification after the conglomerate merger wave. We also find that acquirer returns varied over time (positive in the 1960s, negative in the 1980s), but the estimates are hard to square with the idea that diversification was primarily driven by managerial objectives.