China's diversification discount: The role of the information environment

Abstract

Based on information uncertainty, in this paper, we provide a mispricing explanation for the diversification discount in the Chinese A-shares market. The empirical evidence reveals an overestimation of a diversified company's value due to the uncertain information of such companies, and this overestimation is stronger when exacerbated by high sentiment. Moreover, we provide new evidence of the year breakpoint in the diversification discount during different sample subintervals, which relies on a change in ex post mispricing related to the macroeconomic environment.