While the strategic management literature suggests that related diversification is superior to unrelated diversification, there is little evidence that acquirers benefit from pursuing related targets. We argue that the empirical literature is plagued by poor measures of relatedness. Moreover, many empirical studies do not control adequately for the characteristics of the market for corporate control. We argue that not only value creation, but also value appropriation, depend on the relatedness of acquirer and target. Using an improved measure of relatedness, we provide empirical evidence that acquirer returns are positively and significantly correlated with relatedness.
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