The role of target public ownership in the shareholder wealth effects of diversification

Abstract

I study announcement returns from 32,377 acquisitions in the U.S. between 2003 and 2017 to further research the wealth effects of corporate diversification for the bidding firm shareholders. I take a novel look at target listing status (publicly listed or privately held) as the explaining factor for the lower returns on diversifying acquisitions by using a dataset consisting of publicly listed and privately held target firms. I find diversifying acquisitions to yield significantly lower abnormal returns for the acquirer compared to related mergers and that the target company’s listing status acts as the primary driver for the difference. When controlling variables proven to impact bidding firm share price, target listing status’ effect on diversifying acquisitions abnormal returns remains significantly negative, confirming that investors do not seem to like diversification towards publicly traded companies. Additionally, my periodic analysis shows that the most recent financial crisis did not play much of a role in the returns on diversification.