Product and Market Diversification and the Stock Market Response to Business Combinations: Empirical Evidence from the European Telecommunications Industry

Abstract

In this chapter, we analyzed the stock market reaction to internationalization and diversification of the European telecom firms through acquisitions or strategic alliances. We analyzed these operations with the purpose of verifying to what extent the stock market reaction to these business combinations is influenced by information asymmetry, resource complementarity, and management costs. There are two main findings of this work. First, while acquisitions are more valued when entering into one of the more related businesses—telecommunication equipment shops—alliances, however, are only positively valued in the less related businesses. Second, the strength of the competitive position of the firm moderates the relationship between product and market diversification and abnormal returns.