Revisiting the Relatedness Paradox: The Impact of Relatedness on Acquiring and Rival Firm Value

Despite intuitive appeal, empirical evidence supporting the relatedness hypothesis has been scant, as it has not been established that related acquisitions generally outperform non-related acquisitions. In considering the impact of merger relatedness on not only acquiring-firm value – as is standard in the empirical literature – but also on non-merging rival firm value, we offer a methodological approach that sidesteps common critiques of this literature. Specifically, our two-stage least squares approach corrects for obvious endogeneity in the rival-effects equation and allows merger relatedness to impact both the 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. In line with a more-novel approach to testing relatedness, we find that rival-firm value tends to decrease when merging firms exhibit higher degrees of relatedness. Thus by simultaneously considering the impact of relatedness on acquiring-firm value and non-merging rival-firm value in an integrated manner, the relatedness hypothesis is empirically supported.