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The B.E. Journal of Economic Analysis & Policy

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Volume 4, Issue 1 (Apr 2004)


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Volume 1 (2001)

What Do We Know About Cross-subsidization? Evidence from Merging Firms.

Judith Chevalier
  • 1Yale University,
Published Online: 2004-04-18 | DOI: https://doi.org/10.2202/1538-0637.1218


A substantial empirical literature documents value-destroying “cross-subsidization” among the divisions of diversified firms. However, this literature relies upon two maintained hypotheses: that divisions of diversified firms are randomly allocated to their corporate parents and that the investment opportunities facing conglomerate divisions are identical to those of stand-alone firms in their industries. I examine the investment behavior prior to merger of a sample of firms that undertook diversifying mergers between 1980 and 1995. I show that, in my sample, investment patterns that the literature has attributed to cross-subsidization between divisions are apparent in the pairs of merging firms prior to their mergers. Thus, some of the cross-subsidization results in the literature may be attributable to selection bias. I also examine stock market responses to announcements of diversifying acquisitions. The event responses are largely independent of measures of the extent to which the merger is diversifying.

Keywords: diversification; investment

About the article

Published Online: 2004-04-18

Citation Information: Advances in Economic Analysis & Policy, ISSN (Online) 1538-0637, DOI: https://doi.org/10.2202/1538-0637.1218. Export Citation

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