ORIGINAL RESEARCH Firm value and investment policy around stock for stock mergers Adel Bino • Elisabeta Pana Published online: 14 September 2010 Ó Springer Science+Business Media, LLC 2010 Abstract We study a sample of publicly traded firms that expand by acquiring other firms in pure, stock-for-stock mergers. After these mergers, we find that the diversification premium decreases for the acquiring firm due to having added a target firm trading at a discount. Furthermore, the acquiring firm experiences a decrease in investment opportu- nities and a decrease in leverage. This is an effect confined only to non-diversifying mergers. Our results indicate that the acquirer’s investment efficiency at the firm level remains unchanged after the merger. Keywords Internal capital markets  Mergers  Diversification JEL Classification G31  G32  G34 1 Introduction Recent empirical studies have uncovered some of the differences between the merger wave of the 1980s and that of the late 1990s. One of the important features of the latter is the prevalence of stock-financed acquisitions, which counted for nearly 70% of the total deals (Andrade et al. 2001). Research indicates that stock-financed mergers have an association with systematically low premiums for target firm stockholders, significantly negative abnormal returns for acquiring firm stockholders, and low net synergistic gains (Maquieira et al. 1998). Moreover, Moeller et al. (2005) argue that the merger wave of the late 1990s has an association with higher stock valuation and more takeover defenses in place than the mergers of the 1980s. A. Bino (&) Department of Finance, University of Jordan, Amman, Jordan e-mail: a.bino@ju.edu.jo E. Pana Department of Business Administration, Illinois Wesleyan University, Bloomington, IL 61902, USA e-mail: epana@iwu.edu 123 Rev Quant Finan Acc (2011) 37:207–221 DOI 10.1007/s11156-010-0201-4