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Does Corporate Diversification Reduce Firm Risk? Evidence from Diversifying Acquisitions

Author

Listed:
  • Randy I. Anderson

    (Department of Finance, University of Central Florida, BA 427F, Orlando, FL 32816, USA)

  • John D. Stowe

    (Department of Finance, Ohio University, Copeland 201A, Athens, OH 45701, USA)

  • Xuejing Xing

    (Department of Accounting and Finance, University of Alabama in Huntsville, BAB 315, Huntsville, AL 35899, USA)

Abstract

The main purpose of this paper is to investigate empirically whether corporate diversification reduces the risk of the diversifying firm. We investigate this issue using a sample of diversifying acquisitions and various risk measures. We find that corporate diversification tends to decrease the risk of some firms but increase the risk of many others. On average corporate diversification does not lower firm risk. These findings call into question the notion that corporate diversification strictly reduces firm risk.

Suggested Citation

  • Randy I. Anderson & John D. Stowe & Xuejing Xing, 2011. "Does Corporate Diversification Reduce Firm Risk? Evidence from Diversifying Acquisitions," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 485-504.
    • Handle: RePEc:wsi:rpbfmp:v:14:y:2011:i:03:n:s0219091511002214
    DOI: 10.1142/S0219091511002214
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    References listed on IDEAS

    as
    1. Craig H. Furfine & Richard J. Rosen, 2006. "Mergers and risk," Working Paper Series WP-06-09, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nilakshi Borah & Liu Pan & Jung Chul Park & Nan Shao, 2018. "Does corporate diversification reduce value in high technology firms?," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 683-718, October.
    2. Jeffrey Harrison & Matthew Hart & Derek Oler, 2014. "Leverage and acquisition performance," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 571-603, October.
    3. Dimitris Andriosopoulos & Leonidas G. Barbopoulos, 2017. "Relative equity market valuation conditions and acquirers’ gains," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 855-884, October.
    4. Hari P. Adhikari & Thanh T. Nguyen & Ninon K. Sutton, 2018. "The power of control: the acquisition decisions of newly public dual-class firms," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 113-138, July.
    5. Yun Meng & Ninon K. Sutton, 2017. "Is the grass on the other side greener? Testing the cross-border effect for U.S. acquirers," Review of Quantitative Finance and Accounting, Springer, vol. 48(4), pages 917-937, May.
    6. Soon-Beng Chew & Wei Quan Jeffrey Huang & Hui Ching Chia & Huang Chi Soh, 2016. "Determinants of Corporate Social Responsibility of a Social Enterprise: An Empirical Analysis," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-20, September.
    7. M. Kabir Hassan & M. Sydul Karim & Tarun Mukherjee, 2023. "Does corporate diversification retrench the effects of firm‐level political risk?," The Financial Review, Eastern Finance Association, vol. 58(4), pages 663-702, November.
    8. Thang Nguyen & Charlie X. Cai & Patrick McColgan, 2017. "How firms manage their cash flows: an examination of diversification’s effect," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 701-724, April.
    9. Mark Holder & Aiwu Zhao, 2015. "Value exploration and materialization in diversification strategies," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 175-213, July.
    10. Yasser Alhenawi & Martha L. Stilwell, 2019. "Toward a complete definition of relatedness in merger and acquisition transactions," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 351-396, August.

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    More about this item

    Keywords

    Corporate diversification; systematic risk; firm-specific risk; total risk; acquisitions;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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