Two Sides of a Coin: Endogenous and Exogenous Effects of Corporate Diversification on Firm Value

23 Pages Posted: 6 Dec 2012

See all articles by Xi He

Xi He

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

Date Written: December 2012

Abstract

We investigate the value effects of two types of corporate diversification – unexpected exogenous diversification and endogenous diversification. Combining Heckman's sample‐selection estimator with a two‐stage least squares estimator and a generalized method of moments instrumental variables estimator to control for both endogeneity and sample‐selection bias, we find that while an unexpected increase in diversification caused by exogenous shocks destroys firm value, an endogenous increase in diversification due to managerial decisions will enhance firm value, indicating a diversification premium from altering organizational structures.

Suggested Citation

He, Xi, Two Sides of a Coin: Endogenous and Exogenous Effects of Corporate Diversification on Firm Value (December 2012). International Review of Finance, Vol. 12, Issue 4, pp. 375-397, 2012. Available at SSRN: https://ssrn.com/abstract=2185803 or http://dx.doi.org/10.1111/j.1468-2443.2012.01158.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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