The Performance of Conglomerate Corporations: Unsystematic Risk and Jensen's Alpha

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Economics | Social and Behavioral Sciences


Charles Rambeck, Economics


Conglomerate mergers involve merging with a firm which is completely unrelated to the acquiring firm's main line of business. Conglomerates became the popular corporate entity during the third merger wave occurring in the mid-1960s. The rise in the popularity of the conglomerate corporate structure was the result of stricter enforcement against horizontal and vertical mergers which the federal trade commission believed had tendencies to reduce competition. The capital asset pricing model is used to obtain "Jensen's Alpha", which is a measure of conglomerate firm's ability to engage in mergers which are able to exploit synergistic benefits and outperform the markets prediction. The correlation coefficient rim is a measure which identifies conglomerates ability to reduce unsystematic risk through diversification. Using these performance measures eighteen conglomerate corporations were examined from 1984 to 2001. Consequently, conglomerate corporations do not completely eliminate unsystematic risk through the diversification of separate lines of businesses and fail to engage in mergers that outperform the markets prediction.