Do Entrepreneurs Make Predictable Mistakes? Evidence from Corporate Divestitures

A fter a brief lull in the early 1990s, the market for corporate control became increasingly active toward the end of the decade. Both 1996 and 1997 set new records for the number of U.S. merger filings, and 1998, 1999, and 2000 brought high-profile “mega-mergers” in financial services, energy, telecommunications, pharmaceuticals, and automobiles. In banking alone, for example, a wave of mergers over the last decade has led to widespread industry restructuring and consolidation. While total industry activity continues to expand, the number of U.S. banks and banking organizations both fell by almost 30 percent between 1988 and 1997 (Berger, Demsetz, and Strahan 1999). Like other business practices that do not conform to textbook models of competition, mergers, acquisitions, and financial restructurings have long been viewed with suspicion by some commentators and regulatory authorities. However, the academic literature clearly suggests that corporate restructurings do, on average, create value. Event studies of acquisitions consistently find positive average combined returns to acquirer and target shareholders. As summarized by Jensen (1991, p. 15), “the most careful academic research