Degree Name

BS

Department

Finance

College

Marriott School of Management

Defense Date

2019-11-07

Publication Date

2020-01-02

First Faculty Advisor

Dr. Brian Boyer

First Faculty Reader

Dr. Todd Mitton

Honors Coordinator

Dr. Hal Heaton

Keywords

Equity, Volatility, Acquisition, Diversification, Merger, Risk

Abstract

The objective of this research was to discover whether a significant relationship exists between the theoretically diversifying effects of inter-industry mergers and acquisitions (“M&A”) and changes in the volatilities of acquisitive firms’ publicly-traded equity security returns (measured as the standard deviation of percentage changes in price) from pre-transaction announcement to post-transaction completion. My hypothesis is that a negative relationship should exist between changes in a firm’s equity return volatility over time and whether the firm completes a diversifying acquisition, which I define as one in which the target firm primarily operates in a different industry than the acquirer. 980 diversifying and 9256 non-diversifying M&A transactions announced and completed between January 1980 and June 2017 were included in this research. When various systematic and idiosyncratic factors which affect the volatility of equity returns were controlled in a multiple regression, a statistically significant, negative relationship was discovered between whether a firm completes a diversifying acquisition and the change in the firm’s equity return volatility from a pre-transaction announcement period to a post-transaction completion period. All factors considered in the multiple regression were found to be statistically significant. The multiple regression results also suggest that the most significant factors influencing changes in acquirers’ equity return volatilities during the time periods surrounding M&A transactions are idiosyncratic.

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