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Research Abstracts Online
January - December 2011

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University of St. Thomas
College of Business
Department of Finance

PI: Mufaddal Baxamusa

Internal Capital Markets and Unrelated Acquisitions

This researcher is examining an underexplored aspect of the market for corporate control. A large fraction of acquisitions occur between unrelated firms—acquisitions that cannot be characterized as either horizontal or vertical mergers. This project examines the characteristics of non-related acquirers and finds that multiple measures of information asymmetry or opaqueness are correlated with non-related acquirer status. Consistent with this, the researchers finds that non-related acquirers have fewer bank relationships and fewer large loans, suggesting they are constrained relative to accessing financing. Nonetheless, he finds that non-related acquisitions have positive cumulative abnormal announcement returns and outperform related acquisitions. Post-merger operating performance is also quite positive, suggesting that these are value-creating mergers. He also finds that post-merger for non-related acquisitions, target firm segments’ cash flows are used to finance acquirer firm segments’ investments, consistent with non-related acquisitions occurring to create an internal capital market where target firm cash flows cross-subsidize acquiring firm investments. The amount of data used in this research is huge. The computational resources required for this project is also very large. Hence, the computational resources at MSI are needed to make this project possible.