Excess cash flows and diversification discount

We study the impact of diversification on firm cash flows and excess value. Specifically, we investigate whether there is a direct link between the discount to diversification and excess cash flow reductions around related and unrelated acquisitions. Our results provide empirical support for a positive and significant association between excess cash flow declines and excess value losses after the acquisition. Our findings also show that bidders who conduct unrelated acquisitions experience larger excess cash flow declines and valuation discounts than do bidders who engage in related acquisitions. Our results are robust to the targets' excess cash flow and valuation characteristics.