The Effect of Forced Refocusing on the Value of Diversified Firms

35 Pages Posted: 22 Mar 2014 Last revised: 26 Apr 2014

See all articles by John G. Matsusaka

John G. Matsusaka

University of Southern California - Marshall School of Business; USC Gould School of Law

Yongxiang Wang

University of Southern California - Marshall School of Business

Date Written: April 25, 2014

Abstract

This paper studies how investors responded when Chinese regulators required a group of large, publicly traded companies to divest their non-core hotel and real estate assets in 2010. The quasi-experiment allows direct estimates of the effect of diversification on value that are free from common selection problems in the literature. On average, stock prices rose 1 to 2 percent in response to forced refocusing, suggesting that corporate diversification was a value-destroying strategy for those firms. The implied "excess value/diversification discount" has at best a weak connection to the announcement return. The abnormal return was most positive for companies in which the ultimate controller had small cash flow rights, suggesting that investors were concerned with the possibility of tunneling.

Keywords: Diversification, divestiture, refocusing, internal capital markets, business groups, Chinese economy, tunneling

JEL Classification: G34, G32, L21, L22, O16

Suggested Citation

Matsusaka, John G. and Wang, Yongxiang, The Effect of Forced Refocusing on the Value of Diversified Firms (April 25, 2014). USC Law Legal Studies Paper No. 14-20, USC CLASS Research Paper No. CLASS14-19, Available at SSRN: https://ssrn.com/abstract=2412416 or http://dx.doi.org/10.2139/ssrn.2412416

John G. Matsusaka (Contact Author)

University of Southern California - Marshall School of Business ( email )

Department of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6495 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-6495 (Phone)

Yongxiang Wang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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