Corporate Diversification, Sales Growth, and Capital Market Development: Cross-Country Evidence
59 Pages Posted: 24 Jul 2019
Date Written: April 2018
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
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