Is More Less? Propensity to Diversify via M&A and Market Reactions

Mergers and acquisitions (M&A) could lead to a firm diversifying into new industries, and the impact of this may be related to the firm's prior diversification. Using a panel of 1,030 M&A transactions from 2000-2010, we find that that previously diversified firms are more likely to pursue industrially diversifying M&A. Both previous and contemporary diversification measures are not associated with the firm's cumulative abnormal returns (CAR) at time of announcement but have a lasting effect on various performance measures up to two years later. We find evidence supporting both a diversification discount and premium, which can be predicted by the sign of the CAR at time of announcement. This suggests that while diversification is necessary to explain firm value, it is not sufficient