Corporate Structure and Equity Offerings: Are There Benefits to Diversification?

Abstract

We examine the effect of corporate diversification on the equity issue process in a sample of 641 equity issues from 1983 to 1994. We find that issues by diversified firms are viewed less negatively by the market than are issues by focused firms. This finding supports the hypothesis that diversification helps alleviate asymmetric information problems. Our results appear inconsistent with the hypothesis that reduced transparency exacerbates asymmetric information problems for diversified firms. The results also appear inconsistent with the hypothesis that the market anticipates that the funds raised from equity issues by diversified firms will be invested in particularly poor projects.