WXI + (1 - W)X2 (1) where: = a random variable denoting the the new firm, postmerger return to shareholders of * The University of Illinois and The Hebrew University, Jerusalem. t The Hebrew University, Jerusalem. The authors gratefully acknowledge a research grant from the David Himmelblau Fund. 1. A clear statement (without formal proof) of the principle that diversification by means of conglomerate mergers may not produce an economic gain for shareholders is given by Alberts . 2. For the purposes of this paper we make the usual assumption of a one-to-one correspondence between the risk-return characteristic of the firm and the risk-return characteristic of the firm's common stock. For a justification of such an approach, see Miller and Modigliani . The Journal of Finance Xl and X2 vidual firms, in the absence of the merger. w = the relative size of the first firm, and 1 - w = the relative size of the second firm. The expected return after the merger, (us), equals the weighted average of the expected returns (ui and U2) of the individual firms making up the marger: Us = random variables denoting the return to shareholders of the two indi- =
The Journal of Finance – Wiley
Published: Sep 1, 1970
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