As in previous decades, merger activity clusters by industry during the 1990s. One particular kind of industry shock, deregulation, becomes a dominant factor, accounting for nearly half of the merger activity since the late 1980s. In contrast to the 1980s, mergers in the 1990s are mostly stock swaps, and hostile takeovers virtually disappear. Over our 1973 to 1998 sample period, the announcement-period stock market response to mergers is positive for the combined merging parties, suggesting that mergers create value on behalf of shareholders. Consistent with that, we find evidence of improved operating performance following mergers, relative to industry peers.

Agency Problems, Equity Ownership, and Corporate Diversification We provide evidence on the agency cost explanation for corporate diversification by documenting three principal findings. First, there is a strong negative relation between the extent of diversification and managerial equity ownership after controlling for other factors related to diversification. Second, there is a weak negative relation between the value loss from diversification and managerial ownership. Third, decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings are consistent with the hypotheses that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend towards increased corporate focus is attributable to market disciplinary forces. 3 Agency Problems, Equity Ownership, and Corporate Diversification Several recent studies examine the valuation consequences ...

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We analyze the market for corporate assets. There is an active market for corporate assets, with close to seven percent of plants changing ownership annually through mergers, acquisitions, and asset sales in peak expansion years. The probability of asset sales and whole-firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. The timing of sales and the pattern of efficiency gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms.

We study shareholder returns for firms that acquired five or more public, private, and0or subsidiary targets within a short time period. Since the same bidder chooses different types of targets and methods of payment, any variation in returns must be due to the characteristics of the target and the bid. Results indicate bidder shareholders gain when buying a private firm or subsidiary but lose when purchasing a public firm. Further, the return is greater the larger the target and if the bidder offers stock. These results are consistent with a liquidity discount, and tax and control effects in this market. Takeovers are one of the most important events in corporate finance, both for a firm and the economy. Extensive research has shown that shareholders in target firms gain significantly and that wealth is created at the announcement of takeovers ~i.e., combined bidder and target returns are positive!. However, we know much less about the effects of takeovers on the shareholders of acquiring firms. Evidence suggests that these shareholders earn,

I examine whether the discount of diversified firms can actually be attributed to diversification itself, using recent econometric developments about causal inference. The value effect of diversification is unbiasedly estimated by matching diversified and specialized firms on the propensity score----the predicted values from a probit model of the propensity to diversify. I apply this method on a sample of diversified firms that trade at a significant mean and median discount relative to specialized firms of similar size and industry. I find that, when a more comparable benchmark based on propensity scores is used, the diversification discount as such disappears or even turns into a premium. 1 In a seminal paper, Wernerfelt and Montgomery (1988) find that diversification has a negative effect on firm value, as measured by Tobin's q. Their result has been confirmed by the later studies of Lang and Stulz (1994), Berger and Ofek (1995), and others who, using an industry-adjusted Tobin's ...

Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs' personal overinvestment in their company and their press portrayal. We find that the odds of making an acquisition are 65 % higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (–90 basis points) is significantly more negative than for non-overconfident CEOs (–12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.

The issue of public versus private ownership turns on three questions: (1) does competition matter more than ownership? (2) are state enterprises are more subject to welfare reducing interventions by government than are private firms? And (3) do state enterprises suffer more from corporate governance problems than private firms? Even if the answers to these questions favors private ownership, we must still ask whether distortions in the process of privatization mean that privatized firms perform worse than state enterprises. Our review found greater ambiguity about the merits of private ownership and privatization in theory than in the empirical literature. Empirical research comparing private or privatized firms with a state owned counterfactual documented gains in most cases. JEL Codes: L32 Public Enterprises; L33 Boundaries of Public and Private Enterprise; Privatization; Contracting Out; D21 Firm Behavior; D23 Organizational Behavior; Transactions Costs; Property Rights; 3 1.

This paper studies how firms use acquisitions to achieve long-term business reconfiguration. We base the study in a routine-based perspective on business dynamics. We develop and test hypotheses concerning the relative extent of change by acquiring and non-acquiring businesses, focusing on product line addition, retention, and deletion as forms of changing resources. We develop and test hypotheses that compare and contrast resource-deepening and resource extension arguments. We test the hypotheses with data from more than 3000 firms that offered more than 200 product lines in the U.S. medical sector between 1978 and 1995. We find that acquisitions play a major role in business reconfiguration, offering opportunities for firms to both build on existing resources and obtain substantially different resources. Copyright © 2000 John Wiley & Sons, Ltd. This paper studies how firms use acquisitions to reconfigure their business resources. Reconfiguration involves the retention, deletion, and addition of resources (Capron, Dussauge, and Mitchell, 1998). We view acquisitions as a key mechanism through which firms attempt to change their businesses (Capron and Mitchell, 1999). Our immediate conceptual goal is to study acquisitions as means of attempting to change both targets and acquirers. This study is a step towards understanding the broader issues surrounding successful and failed business change. The conceptual base for the study derives from what we refer to as a routine-based perspective on strategy, drawing on Williamson (1999). As we describe below, this perspective views firms as bundles of routines, which both provide firm value and create constraints on how businesses Key words: acquisitions; business change; resource reconfiguration; routine-based perspective on strategy

This paper studies redeployment of resources between target and acquiring businesses following horizontal acquisitions. The analysis draws from perspectives that emphasize the strategic importance of resources that are subject to market failure. We define a five-part typology of R&D, manufacturing, marketing, managerial, and financial resources. We show that targets and acquirers frequently redeploy resources following horizontal acquisitions, especially resources that frequently face market failure. We then show that the magnitude of redeployment of each type of resource increases with the asymmetry of the merging businesses ’ relative strength on the resource dimension. The research stresses evolutionary perspectives on business organizations that emphasize the importance of organizational differences in competitive markets. The central premise of our research is that the market for businesses is often more robust than the market for resources. © 1998 John Wiley & Sons, Ltd. Strat. Mgmt. J. Vol. 19, 631–661 (1998)