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Author: José Manuel Campa
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
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: José Manuel Campa
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
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: José Campa
Publisher:
ISBN:
Category : Diversification in industry
Languages : en
Pages : 49
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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: 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: 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: Belen Villalonga
Publisher:
ISBN:
Category :
Languages : en
Pages : 42
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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: Jin-Chuan Duan
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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This paper identifies a key cause for the documented diversification discount, namely diversified firms being traded at a discount relative to focused firms. We attribute such empirical findings to different distributions of diversified firms vis-à-vis focused firms over leverage in the data sample. We replicate Lang and Stulz's (1994) and Berger and Ofek's (1995) main results using a sample from 1985 to 2003 inclusive, and find a significant diversification discount using three different value measures (i.e., Tobin's q, Lang and Stulz's industry-adjusted Tobin's q, and Berger and Ofek's excess value measure). However, diversification discount disappears in almost all sample years once the data sample is first balanced across diversified and focused firms for each of leverage deciles. Our conclusion remains largely intact when various firm characteristics are controlled for in a multiple-regression setting, which in turn suggests that simply including leverage as an explanatory variable fails to properly account for the impact of leverage. Furthermore, we examine the impact caused by endogeneity of the diversification decision. We find no evidence for diversification discount when the leverage-balanced sample is used. However, our results indicate that refocusing premium may still be present after the sample is leverage-balanced.
Author: John Hund
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ISBN:
Category :
Languages : en
Pages :
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The diversification discount (multiple segment firm value below the value imputed using single segment firm multiples) is commonly thought to be generated by agency problems, a lack of transparency, or lackluster future prospects for diversified firms. If multiple segment firms have lower uncertainty about mean profitability than single segment firms, rational learning about mean profitability provides an alternative explanation for the diversification discount that does not rely on suboptimal managerial decisions or a poor firm outlook. Empirical tests which examine changes in firm value across the business cycle and idiosyncratic volatility are consistent with lower uncertainty about mean profitability for multiple segment firms.
Author: Seoungpil Ahn
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Using a sample of diversified firms over the period of 1980-2003, I investigate changes in the diversification discount over the two decades. The time-series pattern of the diversification discount is created by the entrance and exit of discount firms. I find that the distribution of excess value can correctly predict the survivalship of a diversified firm. Discount firms are more likely to reverse their diversification within short time period. By contrast, the survival of diversification strategies among premium firms and focused firms is unrelated to their excess values. After accounting for value effects, premium firms perform better than focused firms and discount firms. I interpret the results as evidence that excess value can correctly identify these firms that are successful and unsuccessful in their diversification.
Author: Belén Villalonga
Publisher:
ISBN:
Category : Diversification in industry
Languages : en
Pages : 38
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