Diversification in M&As: Decision and shareholders’ valuation

The aim of this paper is to analyze the diversification decision in Mergers and Acquisitions (M&As) and how this decision is valued by acquiring shareholders, considering the influence of the legal and institutional environment. Using a sample of 447 M&As announced by European firms, which acquire a target in any country in the world over the period 2002–2007, we find that the weak legal and institutional environment in the bidder country has a positive impact on the diversification decision. After controlling the diversification endogeneity, we observe that acquiring shareholders value diversified M&As negatively in countries with strong legal and institutional environment. This result indicates that the benefits of the internal capital market effect dominate the agency conflicts’ effect. We also observe that acquiring firms with concentrated ownership structures value diversified M&As negatively in countries with strong legal and institutional environment.