We test whether conglomerate mergers produce higher gains to shareholders due to corporate coinsurance than horizontal mergers by comparing the wealth change to shareholders around merger announcement. Conglomerate mergers show higher size-weighted average of bidder and target marginal tax rates than horizontal mergers. The higher marginal tax rates in conglomerate mergers provide extra returns to combined shareholders which vary from 0.23% to 0.46% according to model speci cation of coinsurance benefit to combined shareholders. We further investigate the change in financial leverage and cash holdings after merger completion to nd the channel through which diversified firms make the most of higher marginal tax rates in comparison of specialized rms. The higher marginal tax rates help the consolidated rm to reduce cash holdings but do not have an impact on the leverage change after merger completion. Other coinsurance determinants such as sashow correlation and volatility difference do not affect the change in subsequent change in both nancial leverage and cash holdings. Our test results indicate that diversifying mergers of high bidder and target marginal tax rates enhance the stock value of both bidder and target rm around merger announcement and diversi ed rms realize this coinsurance bene t by reducing cash holdings rather than increasing financial leverage.
Keywords: mergers and acquisitions, corporate coinsurance, diversification, financial leverage, cash holdings
JEL Classi cation Number: G34, G32, G33
