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Explaining the Diversification Discount

2008
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Release : 2008
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Book Synopsis Explaining the Diversification Discount by : José Manuel Campa

Download or read book Explaining the Diversification Discount written by José Manuel Campa. This book was released on 2008. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Explaining the Diversification Discount

1999 Diversification in industry
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Release : 1999
Genre : Diversification in industry
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Book Synopsis Explaining the Diversification Discount by : José Campa

Download or read book Explaining the Diversification Discount written by José Campa. This book was released on 1999. Available in PDF, EPUB and Kindle. Book excerpt:

Can Growth Opportunities Explain the Diversification Discount?

2017
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Release : 2017
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Book Synopsis Can Growth Opportunities Explain the Diversification Discount? by : John D. Stowe

Download or read book Can Growth Opportunities Explain the Diversification Discount? written by John D. Stowe. This book was released on 2017. Available in PDF, EPUB and Kindle. Book excerpt: 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.

The Diversification Discount

2004
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Release : 2004
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Book Synopsis The Diversification Discount by : Bill B. Francis

Download or read book The Diversification Discount written by Bill B. Francis. This book was released on 2004. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Can Investor Recognition Explain the Diversification 'Discount'?

2019
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Release : 2019
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Book Synopsis Can Investor Recognition Explain the Diversification 'Discount'? by : Wei-Hsien Li

Download or read book Can Investor Recognition Explain the Diversification 'Discount'? written by Wei-Hsien Li. This book was released on 2019. Available in PDF, EPUB and Kindle. Book excerpt: 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.

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