Corporate Acquisitions, Diversification, and the Firm’s Lifecycle

Agency theories predict that firms acquire and diversify through acquisitions as they grow older and exhaust their internal growth opportunities, and that they do so for the benefit of managers rather than shareholders. In contrast, we find that acquiring firms are firms with better growth opportunities and performance irrespective of their lifecycle stage. While younger firms acquire more than mature firms, the acquisition rate follows a u-shape through firms’ lifecycle and this u-shape is stronger after accounting for economic conditions. Mature firms do not diversify more than young firms. Using average stock-price reactions, there is no evidence that diversifying acquisitions destroy wealth, whether the acquirer is young or mature, but non-diversifying acquisitions of public firms are associated with wealth losses for shareholders when paid for with equity for both young and mature firms. No other type of acquisitions is associated with wealth destruction for young or mature firms. * Respectively, visiting assistant professor, Ohio State University, and Reese Chair of Banking and Monetary Economics, Ohio State University, NBER, and ECGI. We thank participants at seminars at Purdue University, City University of New York, and the Ohio State University, and Harry DeAngelo, Cam Harvey, Jim Hsieh, John Matsusaka, Max Maksimovic, Gordon Phillips, Jay Ritter, Mike Weisbach, and two anonymous referees for useful comments. We are grateful to Bryan Baugh, Andrei Gonçalves, Yeejin Jang, and Robert Prilmeier for research assistance. E-mail addresses: [email protected] (R.M. Stulz), [email protected] (A.M. Arikan).