Structural Closure and Exposure: Market Reactions to Acquisitions and Divestitures

This paper develops an exchange-network perspective on corporate diversification and proposes two measures of corporate scope: structural closure and structural exposure. Structural closure focuses on exchanges of goods and services inside the firm and proxies for the potential costs of undertaking them through the market instead. By considering exchange relations inside the firm, this measure complements the existing indices that focus on asset relatedness. Structural exposure focuses on exchanges of goods and services across the firm boundary and proxies for the current market-exchange costs as compared to undertaking them inside the firm instead. By focusing on exchanges across the firm boundary, the measure extends the existing approaches in that it captures what the firm could integrate, but decided not to. We posit that higher structural closure will increase firm value, while higher structural exposure will reduce it. We test these hypotheses using stock market reactions to acquisitions and divestitures undertaken by Fortune 100 firms between 1979 and 1992. We find that acquisitions that increase firm structural closure increase firm value, but those that increase structural exposure diminish it. We find equivalent results for divestitures.