Merger Strategies and Capital Market Risk

Abstract

The literature on corporate diversification suggests a relationship between the relatedness of merging firms and risk. We tested that notion by classifying 297 large mergers into four relatedness categories and by using three measures of risk: unsystematic, systematic, and total. The findings show that risk reduction may be a valid rationale for mergers but not for the reasons often cited. Specifically, all types of mergers are associated with significant increases in unsystematic risk. Related mergers, however, are associated with a significant decline in systematic and total risk. The possible contributions to the results made by market conditions and leverage were explored.