Corporate Diversification, Sales Growth, and Capital Market Development: Cross-Country Evidence

59 Pages Posted: 24 Jul 2019

See all articles by Taek Ho Kwon

Taek Ho Kwon

Bowling Green State University - Department of Finance

Sung C. Bae

Bowling Green State University - Department of Finance

Soonhong Park

Chungnam National University

Date Written: April 2018

Abstract

This paper highlights the interactions of sales growth with diversification strategies and their joint effects on firm value. Employing firm-level data for 39 countries, we report that firms diversify mainly to cope with their poor sales growth and/or slow growth in their core industries. Consistent with evidence in the literature, we confirm a diversification discount on average for our sample firms. After considering joint changes in sales growth and diversification, however, we uncover the existence of a diversification premium in two situations: (1) when firms expand diversification with their sales growing faster than industry peers; and (2) when firms reduce diversification with declining sales. We further find that the effects of the interactions between sales growth and diversification activity on firm value are more pronounced for developed market firms than for emerging market firms. Overall, our results strongly suggest that despite the negative diversification effect on average, a diversification premium is viable if a firm’s diversification strategy is properly aligned with its business situations such as sales growth.

Keywords: G34, G31

JEL Classification: Sales growth; diversification type; capital market development; cross-country evidence

Suggested Citation

Kwon, Taek Ho and Bae, Sung C. and Park, Soonhong, Corporate Diversification, Sales Growth, and Capital Market Development: Cross-Country Evidence (April 2018). 3rd Chapman Conference on Money and Finance - Financial Market Development in Emerging Asia: Impact on Corporate Performance, Capital Flows and Politics | May 4, 2018, Available at SSRN: https://ssrn.com/abstract=3424426 or http://dx.doi.org/10.2139/ssrn.3424426

Taek Ho Kwon

Bowling Green State University - Department of Finance ( email )

Business Administration 201
Bowling Green, OH 43403
United States

Sung C. Bae (Contact Author)

Bowling Green State University - Department of Finance ( email )

Business Administration 201
Bowling Green, OH 43403
United States
419-372-8714 (Phone)
419-372-2875 (Fax)

Soonhong Park

Chungnam National University ( email )

Korea

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