Corporate diversification and firm value: evidence from emerging markets

Abstract

Purpose – The purpose of this paper is to investigate the impact of corporate diversification on firm value in a sample of nine emerging markets including Brazil, Chile, Indonesia, Malaysia, Philippines, Poland, South Africa, Thailand, and Turkey. For the purpose of this study, a company is classified as diversified when it is operating in two or more lines of business defined by the two-digit SIC codes. Design/methodology/approach – Employing panel data from 1,568 companies for the period 2005-2010, this paper estimates both a fixed effects model and a dynamic generalized method of moments model. Data are collected both at company level and segment level within each firm. Findings – Overall, analysis results suggest that, for the period from 2005 to 2010, diversified firms in emerging markets are valued more compared to single-segment firms operating in similar industries, providing support for diversification premium. Originality/value – The effect of diversification on company value in emerging markets is an important managerial and public policy concern. Although the literature on developed country diversified firms is rich, only a few studies have examined diversification-value relationship in the context of developing countries. Furthermore, most previous research on the value effects of corporate diversification in emerging markets has taken the form of case studies within countries and concentrated on the 1990s. This paper tries to fill these gaps by using a larger sample and more recent data and methodology.