Diversification to Mitigate Expropriation in the Tobacco Industry

Abstract

While it is well-established that diversifying acquisitions by large cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show wealth creation increases in (1) the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms' influence in more political districts), and (2) the liquidity of tobacco firms' assets (converting cash to harder-to-expropriate operating assets). We also predict and find that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.