The cost of capital effect of M&A transactions: Disentangling coinsurance from the diversification discount

Abstract

This study argues that in corporate diversification there is a bright side (coinsurance effect) and a dark side (diversification discount). While diversification might reduce systematic risk by its impact on the cost of financial distress, it might increase systematic risk because of inefficient cross‐subsidization at the same time. Building on an extension of the model of Hann, Ogneva, and Ozbas (), we analyze mergers and acquisitions in the US over the period 1985 to 2014. We find the coinsurance effect to decrease the cost of capital by 36 basis points for the average firm. However, at the same time, we observe a 7 basis points increase in the cost of capital related to the inefficiency of the firm's internal capital market. Both effects are statistically significant and robust to endogeneity concerns, different empirical specifications, and variable measurement.

The Dominant Motives of Mergers and Acquisitions in the Energy Sector in Western Europe from the Perspective of Green Economy

“…In the second case, it is about tax savings-the acquisition of a company incurring a loss can be used to reduce the taxation of profit after the acquisition. Other reasons for this type of transaction of a financial nature include, for example, an increase in the possibility of incurring liabilities in the case of merged entities, or the possibility of using cheaper sources of financing because the transaction lowers the risk for lenders [52]. What is characteristic of transactions concluded based on financial motives is that the intended effects of these transactions can be achieved even in the absence of other benefits from the M&A process.…”