A BEJEAP Advances article.

Abstract

A substantial empirical literature documents value-destroying “cross-subsidization” among the divisions of diversified firms. However, this literature relies upon two maintained hypotheses: that divisions of diversified firms are randomly allocated to their corporate parents and that the investment opportunities facing conglomerate divisions are identical to those of stand-alone firms in their industries. I examine the investment behavior prior to merger of a sample of firms that undertook diversifying mergers between 1980 and 1995. I show that, in my sample, investment patterns that the literature has attributed to cross-subsidization between divisions are apparent in the pairs of merging firms prior to their mergers. Thus, some of the cross-subsidization results in the literature may be attributable to selection bias. I also examine stock market responses to announcements of diversifying acquisitions. The event responses are largely independent of measures of the extent to which the merger is diversifying.

Submitted: October 24, 2003 · Accepted: March 10, 2004 · Published: April 18, 2004

Originally published in Advances in Economic Analysis & Policy.

Recommended Citation

Chevalier, Judith (2004) "What Do We Know About Cross-subsidization? Evidence from Merging Firms.," Advances in Economic Analysis & Policy: Vol. 4 : Iss. 1, Article 3.
Available at: http://www.bepress.com/bejeap/advances/vol4/iss1/art3