Rajesh K. Aggarwal
Mufaddal H. Baxamusa
University of St. Thomas
June 28, 2013
AFA 2013 San Diego Meetings Paper
A large fraction of acquisitions occur between unrelated firms-acquisitions that are neither horizontal nor vertical. Unrelated acquirers have high levels of information asymmetry, have a higher cost of capital, are more financially constrained, and use more stock in their acquisitions. Nonetheless, unrelated acquisitions have positive cumulative abnormal announcement returns and outperform related acquisitions. Post-merger operating performance is also quite positive, suggesting that these are value-creating mergers. Post-merger, acquirer firm segments’ investments increase, consistent with unrelated acquisitions relaxing information asymmetry constraints on financing.