Corporate Diversification Value Research Articles

CEO Overconfidence and Corporate Diversification Value

This study provides evidence that diversified firms run by overconfident CEOs experience 12.5 to 14.1 percent value loss compared to diversified firms run by rational CEOs. In addition, the odds of corporate refocusing are 67 to 98 percent higher when past diversifications are made by overconfident than rational CEOs. Such value-destructive corporate investments are due to excessive diversified-business entry mistakes, especially when overconfident CEOs run cash-rich firms. Overall, these findings suggest that CEO overconfidence offers a novel explanation for the value loss of corporate diversification and the adoption of post-diversification refocusing strategies aiming to restore firm value.

The effect of the financial crisis on the value of corporate diversification in Spanish firms

This paper examines the impact of the financial crisis on the value of corporate diversification in a civil law country such as Spain. The financial crisis offers a natural research experiment to test the effect of a credit-constrained environment on benefits and costs emerging from internal capital markets. Using a panel of Spanish listed firms over the 1997–2012 period and controlling for endogeneity, we find that the financial crisis negatively moderates the impact of industrial diversification on a firm’s value. This result supports the idea that financial constraints are likely to exacerbate agency costs within internal capital markets in civil law countries over financial benefits, due to a weaker protection of investors’ rights.

The Effect of Institutional Factors on the Value of Corporate Diversification

Using a large sample of diversified firms from 38 countries we investigate the influence of several national-level institutional factors or ‘institutional voids’ on the value of corporate diversification. Specifically, we explore whether the presence of frictions in a country’s capital markets, labor markets, and product markets, affect the excess value of diversified firms. We find that the value of diversified firms relative to their single-segment peers is higher in countries with less efficient capital and labor markets, but find no evidence that product market efficiency affects the relative value of diversification. These results provide support for the theory of internal capital markets that argues that internal capital allocation would be relatively more beneficial in the presence of frictions in the external capital markets. In addition, the results show that diversification can be beneficial in the presence of frictions in the labor market.

The Value of Corporate Diversification: A Debt Market Perspective

We assess the impact of corporate industrial diversification on the cost of public-debt financing and investigate how this relation is affected by the quality of segment disclosures. Using a large sample of U.S. bond issues, we document that the degree of a firm’s industrial diversification is associated with significantly lower bond-offering yields, and that this association is more pronounced for firms with higher segment disclosure quality. These findings suggest that public debt-holders are better able to assess the level of co-insurance provided by a firm’s diversification status when segment disclosures are superior. We further investigate the role of segment disclosures on the pricing of syndicated loans where the size of the bank syndicate decreases access to private information, thus making public segment reporting more relevant. We find that segment disclosure quality has a similar effect on the relation between a firm’s diversification and the syndicated loan spreads when the bank syndicates are large. Overall, our results highlight the importance of segment disclosure quality when assessing the effect of diversification on a firm’s cost of debt financing.

Capital Market Development, International Integration, Legal Systems, and the Value of Corporate Diversification: A Cross-Country Analysis

Using a database of more than 8,000 companies from 35 countries, we find that the value of corporate diversification is related to the level of capital market development, international integration, and legal systems. Our results suggest that the financial, legal, and regulatory environments each have an important influence on the value of diversification. Moreover, the optimal organizational structure and corporate governance may be very different for firms operating in emerging markets than they are for firms operating in more developed and internationally integrated countries.

The Value of Corporate Diversification: Evidence from Post-Merger Performance in Japan

The choice between specialization and diversification in corporate business activity has become the center of large body of corporate finance literature in recent years. U.S. empirical evidence on the effects of diversification after merger is mixed, suggesting that the diversification benefits of mergers change over time. This is the first paper to examine the long-term operating performance following mergers of manufacturing firms traded on the Tokyo Stock Exchange for the period from 1969 to 1992. Using a unique data set that includes the pre-merger performance of the target and acquirer firms, we find that the long-term operating performance following the mergers is positive but insignificant. However, the long-term performance is significantly greater following diversifying mergers, and there is a remarkable degree of consistency between the pre-merger and post-merger performance. Our results are consistent with the view by Hubbard and Palia (1999) who examine the mergers occurring in the U.S. during the 1960s, and find positive abnormal returns in bidder firms of diversifying mergers. Finally, we show that rescue mergers involving distressed targets are not likely to lead to inferior long-term performance contrary to the notion that acquisitions of poorly performing firms are less likely to succeed. This is a contrast to the results of Clark and Ofek (1994) who examine acquisitions of distressed targets in the U.S. and report that the bidders are not successful in restructuring the target firms.

Capital Market Development, Integration, Legal Systems, and the Value of Corporate Diversification: A Cross-Country Analysis

Using a database of more than 8,000 companies from 35 countries, we find that the value of corporate diversification is related to the level of capital market development, integration, and legal systems. Among high-income countries, where capital markets are well developed and integrated, we find a significant diversification discount. By contrast, for the lower income and segmented countries, we find that there is either no diversification discount or a diversification premium. For these firms, the benefits of diversification appear to offset the agency costs of diversification. We also find that a country's legal system and the firm's ownership structure affects the value of corporate diversification among the various countries. In particular, we find that diversification discounts are largest among countries where the legal system is of English origin. We find smaller diversification discounts in countries where the legal system is of German, Scandinavian, or French origin. One interpretation of these results is that internal capital markets generated through corporate diversification are more valuable (or less costly) in countries where there is less shareholder protection and where firms find it more difficult to raise external capital. More generally, our results suggest that the financial, legal, and regulatory environment all have an important influence on the value of diversification, and that the optimal organizational structure and corporate governance may be very different for firms operating in emerging markets than it is for firms operating in more developed and integrated countries.

Corporate diversification, ownership structure, and firm value: The Singapore evidence

We provide international evidence on the level and value of corporate diversification using a sample of 145 Singapore firms. We find that the level of diversification is positively related to firm size and negatively related to the equity ownership of outside blockholders. However, we find no evidence that insider ownership has a significant impact on the level of diversification. We find significant value loss from diversification only for those firms with low managerial ownership, suggesting that value-reducing diversification stems from agency problems. Outside block ownership does not have a significant impact on the value of diversification. Thus, while outside blockholders may act as a deterrent on the level of diversification, there is no evidence that they can effectively reduce the agency problems for those firms with low managerial ownership.

International Evidence on the Value of Corporate Diversification

ABSTRACTThe valuation effect of diversification is examined for large samples of firms in Germany, Japan, and the United Kingdom for 1992 and 1994. We find no significant diversification discount in Germany, but a significant diversification discount of 10 percent in Japan and 15 percent in the U.K. Concentrated ownership in the hands of insiders enhances the valuation effect of diversification in Germany, but not in Japan or the U.K. For Japan, only firms with strong links to an industrial group have a diversification discount. These findings suggest that international differences in corporate governance affect the impact of diversification on shareholder wealth.