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Does vertical diversification create superior value? Evidence from the construction industry

Raudszus, M. and Schiereck, D. and Trillig, J. (2013):
Does vertical diversification create superior value? Evidence from the construction industry.
In: Review of Managerial Science, Springer, pp. 293-325, 8, (3), ISSN 1863-6683,
[Article]

Abstract

The discussion of diversification discounts is one of the most controversial in corporate finance and strategic management. We are eager to reexamine this issue from the standpoint of vertical versus lateral diversification, and horizontal growth through construction industry M&A. We build on previous evidence of positive acquirer abnormal returns for vertical M&A, and we add new insight into stock return risk. Considering the high idiosyncratic risk levels of builders, we expect to find considerable informational content in systematic risk (beta) behavior, which has been neglected to date. In fact, we find that vertical M&A experience a negative asset beta shift, lateral M&A experience an increase in systematic risk, and only horizontal M&A exhibit no risk changes. Hence, our evidence on risk and previous evidence on return-induced wealth creation through vertical M&A shows that related industrial diversification is superior to unrelated—at least in the construction industry.

Item Type: Article
Erschienen: 2013
Creators: Raudszus, M. and Schiereck, D. and Trillig, J.
Title: Does vertical diversification create superior value? Evidence from the construction industry
Language: English
Abstract:

The discussion of diversification discounts is one of the most controversial in corporate finance and strategic management. We are eager to reexamine this issue from the standpoint of vertical versus lateral diversification, and horizontal growth through construction industry M&A. We build on previous evidence of positive acquirer abnormal returns for vertical M&A, and we add new insight into stock return risk. Considering the high idiosyncratic risk levels of builders, we expect to find considerable informational content in systematic risk (beta) behavior, which has been neglected to date. In fact, we find that vertical M&A experience a negative asset beta shift, lateral M&A experience an increase in systematic risk, and only horizontal M&A exhibit no risk changes. Hence, our evidence on risk and previous evidence on return-induced wealth creation through vertical M&A shows that related industrial diversification is superior to unrelated—at least in the construction industry.

Journal or Publication Title: Review of Managerial Science
Volume: 8
Number: 3
Publisher: Springer
Divisions: 01 Department of Law and Economics > Betriebswirtschaftliche Fachgebiete > Corporate finance
01 Department of Law and Economics > Betriebswirtschaftliche Fachgebiete
01 Department of Law and Economics
Date Deposited: 16 May 2013 11:24
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