MARCH 1975 CORPORATE BANKRUPTCY AND CONGLOMERATE MERGER ROBERT C. HIGGINS AND LAWRENCE D. SCHALL* SEVERAL IMPORTANT ATTEMPTS have appeared in recent literature to extend standard valuation theories to include corporate bankruptcy. Thus, under various assumptions regarding capital market imperfections and bankruptcy costs, Baxter , Smith , and Stiglitz [17, 18] argue that there is an optimal firm debt to equity ratio when bankruptcy is possible. Similar attempts to extend valuation theory are evident in the area of corporate diversification and conglomerate merger.' Alberts [1, 2] suggests that the ability of investors to diversify their own portfolios should imply that corporate diversification will produce no added benefits if bankruptcy risk is not present. More recently, Levy and Sarnat  show for the single period capital asset pricing model that, in the absence of corporate bankruptcy, conglomerate merger will have no effect on shareholder wealth. Schall [12, 13] shows for the multiperiod case that with bankruptcy risk and without corporate taxes the total value of the firms before conglomerate merger equals the value of the merged firm; the same result holds with corporate taxes if the debt owed by the merged firm equals the total debt owed by the firms
The Journal of Finance – Wiley
Published: Mar 1, 1975
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