Announcements of purely related and purely unrelated mergers and shareholder returns: Reconciling the relatedness paradox

Empirical research has not generally supported the hypothesis that announcements of related mergers benefit stockholders more than announcements of unrelated mergers. This study uses a new categorization methodology to identify mergers with and without strategic fits. Purely related and purely unrelated mergers occurring between 1972 and 1990 are identified using a combination of objective and subjective categorization methods. Results support the hypothesis that purely related acquirers benefit more than purely unrelated acquirers. Acquiring firm stockholder returns were also higher if the acquisition was friendly or a tender offer. The results did not suggest that acquired firms' shareholders benefit more in purely related acquisitions than in purely unrelated acquisitions. Acquired firms’ stockholder returns were higher if the transaction was a tender offer.