Conglomerate Discount and Cash Distortion: New Evidence from Germany

HHL Working Paper

33 Pages Posted: 15 Apr 2003

See all articles by Bernhard Schwetzler

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Carsten Reimund

Handelshochschule Leipzig (HHL) - Leipzig Graduate School of Management; Allianz SE

Date Written: March 31, 2003

Abstract

Conglomerate discounts or premia are derived by comparing market values of conglomerates with the market values of a matched portfolio of stand alone firms (the imputed value of the conglomerates). Usually this comparison is based on firm values. We show that in this case conglomerate discounts or premia are subject to a potential bias caused by different cash holdings of conglomerates and stand alone firms. We prove evidence of such a cash distortion for German data: as German conglomerates hold on average substantially higher cash positions than the matched portfolio of stand alones, excess firm values are systematically upwards biased. Deducting cash from firm value and calculating discounts or premia based on enterprise values removes the bias. Based on excess enterprise values we are able to show a modest, but statistically significant conglomerate discount in Germany that is about 6% on an enterprise value basis.

JEL Classification: G31, G32

Suggested Citation

Schwetzler, Bernhard and Reimund, Carsten, Conglomerate Discount and Cash Distortion: New Evidence from Germany (March 31, 2003). HHL Working Paper. Available at SSRN: https://ssrn.com/abstract=392321 or http://dx.doi.org/10.2139/ssrn.392321

Bernhard Schwetzler (Contact Author)

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

Carsten Reimund

Handelshochschule Leipzig (HHL) - Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, D-04109
Germany
+49-341-9851-687 (Phone)
+49-341-9851-689 (Fax)

Allianz SE

80802 Munich
Germany

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