Can Growth Opportunities Explain the Diversification Discount? PDF Download
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Author: John D. Stowe
Publisher:
ISBN:
Category :
Languages : en
Pages :
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We investigate the possibility that the diversification discount is due to differing growth opportunities between diversified and single-segment firms. We do this by comparing diversified business segments with individual single-segment same-industry firms of comparable growth opportunities. Using a sample of 230 diversifying firms from 1981 to 1997, we find a significant valuation discount in diversified firms even when we control for the difference in growth opportunities between diversified and single-segment firms. This result suggests that differing growth opportunities between diversified and single-segment firms cannot account for the diversification discount.
Author: John D. Stowe
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We investigate the possibility that the diversification discount is due to differing growth opportunities between diversified and single-segment firms. We do this by comparing diversified business segments with individual single-segment same-industry firms of comparable growth opportunities. Using a sample of 230 diversifying firms from 1981 to 1997, we find a significant valuation discount in diversified firms even when we control for the difference in growth opportunities between diversified and single-segment firms. This result suggests that differing growth opportunities between diversified and single-segment firms cannot account for the diversification discount.
Author: José Manuel Campa
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Diversified firms trade at a discount relatively to similar single-segment firms. We argue in this paper that this observed discount is not per se evidence that diversification destroys value. Firms choose to diversify. Firm characteristics, which make firms diversify, might also causethem to be discounted. Not taking into account these firm characteristics might wrongly attribute the observed discount to diversification. Data from the Compustat Industry Segment File from 1978 to 1996 is used to select a sample of single segment and diversifying firms. We use three alternative econometric techniques to control for the endogeneity of the diversification decision.All three methods suggest the presence of self-selection in the decision to diversify and that a negative correlation exists between firm's choice to diversify and firm value. We do a similar analysis in a sample of refocusing firms. Again, some evidence of self-selection by firms exists and we now find a positive correlation between firm's choice to refocus and firm value. Theseresults consistently suggest the importance of taking the endogeneity of the diversification status into account in analyzing its effect on firm value.
Author: Belen Villalonga
Publisher:
ISBN:
Category :
Languages : en
Pages : 42
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Book Description
This paper examines whether the discount of diversified firms can actually be attributed to diversification itself, using recent econometric developments about causal inference with non-experimental data. The effect of diversification on firm value is unbiasedly estimated by matching diversified and single-segment firms on the propensity score??the predicted values from a probit model of a firm?s propensity to diversify. I apply this method on a sample of diversified firms that trade at a significant mean and median discount relative to single-segment firms of similar size and industry. I find that, when a more comparable benchmark based on the propensity score is used, the diversification discount as such disappears. Therefore, I find no reason to interpret the finding that diversified firms trade at a discount as evidence that diversification destroys value. In fact, my analysis of the propensity to diversify yields support to both value-creating and value-destroying arguments for diversification. I find that diversified firms trade at a significant industry-adjusted discount prior to diversification, which however does not seem to result from their future diversification. In addition, diversifying firms are present in industries with a lower q than those of their non-diversifying counterparts. I also find that, as predicted by agency theory, diversified firms prior to diversifying have a smaller percentage of their stock owned by institutions, insiders, and blockholders, a higher risk, and are likely to diversify into industries with a lower average leverage than their own. I find support for the resource-based theory of diversification as well in that firms are more likely to diversify when faced with opportunities for exploiting potential synergies and when they have enough financial resources to do so. As required for market power-based theories of diversification to hold, firms that diversify are present in industries with higher levels of concentration. More generally, certain industries appear to lend themselves more than others to either inward or outward diversification.
Author: Aiwu Zhao
Publisher:
ISBN:
Category : Diversification in industry
Languages : en
Pages : 89
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Book Description
Empirical studies often show that diversified firms trade at a discount compared to stand-alone firms. The commonly accepted explanation in early studies is that diversification reduces value because of inefficiency in asset allocation and management capability. However, such arguments neglect the real options value incorporated in the value measures employed in diversification studies. It does not explain why a firm diversifies if diversification is ex ante inefficient either. Our study indicates that diversification activities are strategic decisions that will change the growth opportunities, and thus the real options, of a firm and will create value impacts that are different from those caused by changes in operational efficiency. In our study, the theoretical framework of diversification effects is improved by formalizing two contrasting arguments into their corresponding theoretical paradigms. First, under the resource-based view of firm and transaction cost economy argument, unrelated diversification will generate more transaction costs when compared to related diversification, therefore it will be less beneficial to firm value than related diversification. Second, under the real options framework, unrelated diversification tends to have a positive impact on firm value because it creates new growth opportunities for a firm; while related diversification tends to reduce the value measure of a firm because it exercises growth opportunities and thus reduces the real options value. We categorize firms into below industry median and above industry median groups based on their pre-diversification performance. Comparison tests on value changes around diversification and regression analysis indicate that diversification activities have different value implications to below and above median firms. Diversification activities, especially unrelated diversification activities, carried out by below industry median firms tend to be efforts to search for new growth opportunities and firm values tend to increase after diversification. Whereas diversification activities carried out by above industry median firms tend to be moves to exploit excess capabilities and the firm values tend to decrease after diversification. Lower than average performance of a firm tends to suppress the usefulness of some resources, such as research and development input. Diversification may create new opportunities for such resources, so higher research and development level may lead to more future benefits for previous below industry median firms. On the other hand, the future benefits that can be generated by the unique resources possessed by above industry median firms have been fully reflected in current market value. A real assets investment through diversification that materializes these potential will bring down the market-to-book ratio. We find that value changes around diversification are more related to the changes of future growth opportunities rather than the changes of operational efficiencies. It is inappropriate to talk about an overall value impact of all types of diversification activities. The results do not refute the cross-sectional evidence that diversified firms tend to have a lower value compared to focused firms. But such evidence is a collective outcome of the value increase of below average performers and the value decrease of above average performers. It is not an evidence of value destroying effect of diversification. Our study fills the gaps in the diversification literature in which there is disagreement on whether the documented diversification discount is evidence of value destruction. The evidence is also useful for practical diversification decision-making processes.
Author: Todd Mitton
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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A diversified firm can trade at a discount to a matched portfolio of single-segment firms if the diversified firm has either lower expected cash flows or higher expected returns than the single-segment firms. We study whether firms with diversification discounts have higher expected returns in order to compensate investors for offering less upside potential (or skewness exposure) than focused firms. Our empirical tests support this hypothesis. First, we find that focused firms offer greater skewness exposure than diversified firms. Second, we find that diversified firms have significantly larger discounts when the diversified firm offers less skewness relative to matched single-segment firms. Finally, we find that up to 53% of the excess returns received on diversification-discount firms relative to diversification-premium firms can be explained by differences in exposure to skewness.
Author: Bill B. Francis
Publisher:
ISBN:
Category :
Languages : en
Pages : 51
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Book Description
We examine why some diversified firms trade at a discount and others at a premium. Specifically, we examine if the value premium (discount) of premium (discount) diversified firms can be explained by lower (higher) risk exposures and, hence, expected returns, relative to a portfolio of matching focused firms. Using a four-factor conditional asset-pricing model, we find that premium firms have higher expected returns while discount firms have lower expected returns than their corresponding portfolios of matching focused firms. This indicates that the value premium (discount) of premium (discount) diversified firms is due entirely to higher (lower) expected cash flows. In addition, we find that the average diversified firm has significantly lower mean risk exposures and expected returns than a portfolio of matching focused firms. This means that its value discount is due entirely to lower expected cash flows. This is in contrast to Lamont and Polk (2001) who attribute just over 50% of the variation in excess values to future cash flows. Our results also indicate that the value discount of the average diversified firm can be attributed entirely to the expected cash-flow dissipation of discount diversified firms.
Author: Lois M. Shelton
Publisher: Palala Press
ISBN: 9781378150924
Category : History
Languages : en
Pages : 40
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Book Description
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Author: Frithjof Pils
Publisher: Springer Science & Business Media
ISBN: 3834981818
Category : Business & Economics
Languages : en
Pages : 229
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Book Description
Frithjof Pils uses multiple statistical techniques to examine the true nature of the relationships between diversification strategies and accounting-based, market-based, and growth-based performance. The author shows implications for the interpretation of past research, the design of future research including the use of meta-analysis methodologies, as well as management practice.
Author: Wei-Hsien Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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This paper investigates whether the observed diversification “discount” is partly due to the benchmarking error driven by a failure to consider investor recognition, the driver for one of the benefits of corporate diversification. The R-square of regression on the traditional excess value increases more than 50% and the coefficient of the diversified dummy drops more than 20% when the investor recognition proxy is included. In diversifying acquisitions involving targets with low investor recognition, the target firms are traded at a discount, however, the market reaction for those deals are favorable. Investor recognition is positively related to the excess value for standalone firms, acquisition targets, and spunoff units. My findings suggest that the benchmarking error caused by investor recognition explains a significant part of the diversification “discount” and researchers should use the benchmarking procedure with care.
Author: Institute of Chartered Financial Analysts
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 900
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