Revisiting the relatedness hypothesis: The impact of merger relatedness on acquiring and rival firm value

Abstract

Despite intuitive appeal, empirical evidence supporting the relatedness hypothesis has been scant, as it has not been established that related acquisitions generally outperform unrelated acquisitions. In considering the impact of merger relatedness on not only acquiring-firm value – as is standard in the relatedness literature – but also on non-merging rival firm value, we offer an alternative perspective that sidesteps common critiques concerning the detection of the relatedness hypothesis. Specifically, our analytical approach broadens the conception of M&A performance outcomes to allow merger relatedness to impact both acquiring and rival firms. In line with the standard approach to testing relatedness, we find higher acquiring-firm value reactions when merging firms exhibit higher degrees of relatedness; and in line with a more-novel approach to testing relatedness, we find lower rival-firm value reactions when merging firms exhibit higher degrees of relatedness. Thus, by simultaneously examining the impact of relatedness on acquiring-firm and rival-firm value in an integrated manner, the relatedness hypothesis is supported.