Is There Really No Conglomerate Discount?

25 Pages Posted: 3 Mar 2012

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Daniel Hoechle

FHNW School of Business - Institute for Finance; University of Basel - Department of Finance

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January/February 2012

Abstract

Recent research questions the existence of a conglomerate discount. This study addresses two of the most important explanations for the conglomerate discount and finds evidence in support of an economically and statistically significant discount. The first explanation is that the risk‐reducing effect of diversification increases debt value and consequently the use of the book value of debt leads to an underestimation of firm value in diversified firms. We show that the effect of using an imputed market value of debt reduces the conglomerate discount only by a small fraction. However, consistent with the value‐transfer hypothesis, we find the discount to increase in leverage and no discount for all‐equity firms. An agency cost‐based explanation, which reconciles these conflicting findings, is that managers in levered firms become aligned with creditors and reduce firm risk at the expense of shareholders. Hence, the diversification discount only occurs in levered firms and stems from conflicts of interest between managers and shareholders over corporate risk taking. Second, the conglomerate discount may emerge from a neglect of the endogenous nature of the diversification decision. We first show that the conglomerate discount in fact disappears when we account for endogeneity in a Heckman selection model. However, when we account for fixed effects, the conglomerate discount remains statistically and economically significant, also in a Heckman selection‐model or instrumental variables framework.

Keywords: organizational structure, diversification, market value of debt, endogeneity, fixed effects

Suggested Citation

Ammann, Manuel and Hoechle, Daniel and Schmid, Markus, Is There Really No Conglomerate Discount? (January/February 2012). Journal of Business Finance & Accounting, Vol. 39, Issue 1‐2, pp. 264-288, 2012. Available at SSRN: https://ssrn.com/abstract=2015143 or http://dx.doi.org/10.1111/j.1468-5957.2011.02261.x

Manuel Ammann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Daniel Hoechle

FHNW School of Business - Institute for Finance ( email )

Peter Merian-Strasse 86
Basel, CH-4002
Switzerland
+41 61 279 17 73 (Phone)

University of Basel - Department of Finance ( email )

Peter Merian-Weg 6
Basel, CH-4002
Switzerland

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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