Corporate Diversification and Firm Value: Evidence from Post-1997 Data

27 Pages Posted: 8 Dec 2009

See all articles by Xi He

Xi He

Australian National University, Research School of Finance, Actuarial Studies and Applied Statistics

Abstract

In 1997, SFAS 131 established a new segment-reporting standard for US public companies. Using measures of diversification based on the diversity in segment-industry characteristics and controlling for endogeneity of the diversification decision, we document a diversification premium in our post-1997 period. We find significant positive effects of cash flow diversity, leverage diversity and profitability diversity on excess value, consistent with the efficient internal capital market hypothesis. We also find that the size of the diversification premium in the post-1997 data is negatively correlated with the degree of diversification and positively correlated with firm size. In contrast, we find that the pre-1998 data typically generates a diversification discount, but the effect is statistically less significant when endogeneity is controlled for. Thus, the diversification discount documented in earlier studies can be an artifact of the pre-1998 data or a failure to control for endogeneity.

JEL Classification: M44, G32

Suggested Citation

He, Xi, Corporate Diversification and Firm Value: Evidence from Post-1997 Data. International Review of Finance, Vol. 9, No. 4, pp. 359-385, December 2009. Available at SSRN: https://ssrn.com/abstract=1517465 or http://dx.doi.org/10.1111/j.1468-2443.2009.01096.x

Xi He (Contact Author)

Australian National University, Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, Australian Capital Territory 2601
Australia

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