Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases

28 Pages Posted: 13 Oct 2011

See all articles by Sheng‐Syan Chen

Sheng‐Syan Chen

National Taiwan University - Department of Finance

I‐Ju Chen

Yuan Ze University - College of Management

Date Written: September/October 2011

Abstract

We provide evidence that investment efficiency considerations are important in assessing changes in firm value surrounding asset purchases. We account for both the potential endogeneity in purchase decisions and the measurement error in Tobin's q. We find that post-purchase, there are significant declines in both excess value and investment efficiency. This trend occurs primarily among those firms that demonstrate increased diversity following purchases. The change in excess value for diversity‐increasing buyers is positively related to the change in investment allocation surrounding the purchase.

Keywords: asset purchases, diversification, inefficient investment hypothesis, endogeneity

Suggested Citation

Chen, Sheng-Syan and Chen, I-Ju, Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases (September/October 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 7‐8, pp. 887-914, 2011. Available at SSRN: https://ssrn.com/abstract=1943362 or http://dx.doi.org/10.1111/j.1468-5957.2011.02251.x

Sheng-Syan Chen (Contact Author)

National Taiwan University - Department of Finance ( email )

College of Management
50 Lane 144, Section 4
Taipei 32026, Taiwan
China
+886 2 3366 1083 (Phone)

I-Ju Chen

Yuan Ze University - College of Management ( email )

135, Far-East Rd.,
Chung-Li, Taoyuan 32003
Taiwan

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