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Corporate Diversification: What Gets Discounted?
Author(s) -
Mansi Sattar A.,
Reeb David M.
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00492
Subject(s) - diversification (marketing strategy) , leverage (statistics) , financial economics , equity (law) , shareholder , economics , shareholder value , enterprise value , debt , monetary economics , business , econometrics , corporate governance , accounting , finance , statistics , mathematics , marketing , political science , law
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 discount and argue that it stems from risk‐reducing effects of corporate diversification. Consistent with this risk‐reduction hypothesis, we find that (a) shareholder losses in diversification are a function of firm leverage, (b) all equity firms do not exhibit a diversification discount, and (c) using book values of debt to compute excess value creates a downward bias for diversified firms. Overall, the results indicate that diversification is insignificantly related to excess firm value.