Download or read book Explaining the Diversification Discount written by José Manuel Campa and published by . This book was released on 2000 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: Diversified firms trade at a discount relative 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 cause them 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 a negative correlation between firm's choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium, when we control for the endogeneity of the diversification decision. 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. These results consistently suggest the importance of taking the endogeneity of the diversification status into account, in analyzing its effect on firm value.
Download or read book The Diversification Discount written by Bill B. Francis and published by . This book was released on 2004 with total page 51 pages. 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.
Download or read book Does Diversification Cause the Diversification Discount written by Belen Villalonga and published by . This book was released on 2004 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Exploring the Diversification Discount A Focus on High Technology Target Firms written by and published by . This book was released on 2003 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: When firms choose to acquire others, those acquisitions can either be considered diversifying or non-diversifying. Whether the firm diversifies or not has been shown to affect the post-acquisition performance of that firm. Past merger and acquisition (M & A) research has identified a "diversification discount" when firms diversify through M & A activity. However managers continue to diversify, posing the question, "Why do firms continue to diversify in the face of research indicating negative post-acquisition performance"? The answer may be found in that much of the past research has treated all acquisitions the same by analyzing a wide cross-section of acquisitions from industries of all types. This assumption may be wrong, as not all acquisitions are the same. The present research attempts to build on past research by analyzing only a single segment of M & A activity the high-technology industry between the years 1994 and 1998. In addition, this study differs from past research by analyzing firm post-acquisition performance over a longer three-year period. The present research did achieve significant results that may help eliminate some of the clouds over diversification's true impact on M & A activity. A "diversification discount" was identified by the present research, confirming the findings of much of the past M & A literature.
Download or read book Exploring the Diversification Discount written by Donald F. Adkins and published by . This book was released on 2003 with total page 94 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Exploring the Diversification Discount A Focus on High Technology Target Firms written by and published by . This book was released on 2003 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: When firms choose to acquire others, those acquisitions can either be considered diversifying or non-diversifying. Whether the firm diversifies or not has been shown to affect the post-acquisition performance of that firm. Past merger and acquisition (M & A) research has identified a "diversification discount" when firms diversify through M & A activity. However managers continue to diversify, posing the question, "Why do firms continue to diversify in the face of research indicating negative post-acquisition performance"? The answer may be found in that much of the past research has treated all acquisitions the same by analyzing a wide cross-section of acquisitions from industries of all types. This assumption may be wrong, as not all acquisitions are the same. The present research attempts to build on past research by analyzing only a single segment of M & A activity the high-technology industry between the years 1994 and 1998. In addition, this study differs from past research by analyzing firm post-acquisition performance over a longer three-year period. The present research did achieve significant results that may help eliminate some of the clouds over diversification's true impact on M & A activity. A "diversification discount" was identified by the present research, confirming the findings of much of the past M & A literature.
Download or read book The Cost of Diversity written by Raghuram Rajan and published by . This book was released on 1997 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Dynamics of Diversification Discount written by Seoungpil Ahn and published by . This book was released on 2009 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book The Diversification Discount written by Owen A. Lamont and published by . This book was released on 2010 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flow and returns.
Download or read book The Diversification Discount written by Owen A. Lamont and published by . This book was released on 1999 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flow and returns
Download or read book On Diversification Discount the Effect of Leverage written by Jin-Chuan Duan and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Explaining the Diversification Discount written by José Campa and published by . This book was released on 1999 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Cost of Diversity written by Raghuram G. Rajan and published by . This book was released on 2008 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.
Download or read book The Diversification Discount written by and published by . This book was released on with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: What happens when the whole is worth less than the proposed sum of the parts? You've got a diversification discount, common for many unrelated diversifiers in the United States, and one that has led to many corporate breakups. If you're going to diversify, you need to do it the smart way. Learn how here.
Download or read book Longitudinal Analysis of Labor Market Data written by James J. Heckman and published by Cambridge University Press. This book was released on 2008-10-30 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Longitudinal Analysis of Labor Market Data presents a set of papers by leading scholars on methods for analysing the longitudinal data that is available on numerous topics of interest to social scientists. Because many sources of longitudinal data record labour market phenomena such as unemployment, labour supply, earnings mobility, job turnover and participation in training programmes, all of the papers collected in this volume focus on models of the labour market. The main methodological points, however, are more general and apply to such diverse areas as demography, life science analysis and training evaluation, to name only a few, potential avenues of application. The book contains important methodological contributions to the emerging field of longitudinal analysis and is of interest to a wide range of social scientists.
Download or read book Diversification Discount and Targeted Stock written by Shlomit Zuta and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper contains a theoretical and empirical analysis of conglomerate discount and the role of targeted stock in solving it. The sample of firms issuing targeted stock offers unique insights into the nature of the problems existing in diversified firms and the mechanisms by which they might be overcome. The theoretical framework models two divisions with a managerial agency problem arising from differential private benefits across the divisions, which leads to suboptimal investment. The analysis, based on a general and realistic class of managerial compensation contracts, compares the investment policy and firm value under three scenarios: (1) each division operates as a stand-alone firm; (2) the divisions operate as a diversified firm; and (3) the divisions operate as a firm with targeted stocks. Targeted stocks are separate stocks issued by a diversified firm with claims to residual cash flows of the separate divisions. They are publicly traded, while the divisions operate under one management team. The first-best solution is attained in scenario (1) and the optimal contract is characterized. In scenario (2) it is shown that no admissible contract achieves the first-best solution and a diversification discount results. Optimal compensation contracts in scenario (3) are shown to ameliorate the problem of scenario (2) but not solve it completely. Using the universe of targeted stocks, I test the predictions of the model. Targeted stocks are shown to mitigate the discount problem. Their issuance is associated with a positive and significant announcement effect and elicits increased analysts' coverage. These findings are consistent with amelioration of informational problems and alignment of incentives suggested by the model.
Download or read book Can Growth Opportunities Explain the Diversification Discount written by John D. Stowe and published by . This book was released on 2017 with total page pages. 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.
