Corporate Diversification: What Gets Discounted?
Virginia Polytechnic Institute & State University
David M. Reeb
National University of Singapore
Prior literature finds that diversified firms sell at a discount relative to the sum of the imputed values of their business segments. We explore this documented diversification discount and argue that it stems from the risk reducing effects of corporate diversification. Consistent with this risk reduction hypothesis, we find that (i) shareholder losses in diversification are a function of firm leverage, (ii) all equity firms do not exhibit a diversification discount, and (iii) using book values of debt to compute excess value creates a downward bias for diversified firms. When considering the joint impact to both debt and equity holders, we find that, on average, diversification is insignificantly related to excess firm value.
Number of Pages in PDF File: 29
Keywords: Corporate Diversification, Firm Value
JEL Classification: G3
Date posted: October 24, 2001
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