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Corporate Diversification: What Gets Discounted?

29 Pages Posted: 24 Oct 2001  

Sattar Mansi

Virginia Tech

David M. Reeb

National University of Singapore

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Abstract

Prior literature finds that diversified firms sell at a discount relative to the sum of the imputed values of their business segments. We explore this documented diversification discount and argue that it stems from the risk reducing effects of corporate diversification. Consistent with this risk reduction hypothesis, we find that (i) shareholder losses in diversification are a function of firm leverage, (ii) all equity firms do not exhibit a diversification discount, and (iii) using book values of debt to compute excess value creates a downward bias for diversified firms. When considering the joint impact to both debt and equity holders, we find that, on average, diversification is insignificantly related to excess firm value.

Keywords: Corporate Diversification, Firm Value

JEL Classification: G3

Suggested Citation

Mansi, Sattar and Reeb, David M., Corporate Diversification: What Gets Discounted?. Available at SSRN: https://ssrn.com/abstract=286902 or http://dx.doi.org/10.2139/ssrn.286902

David M. Reeb

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

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