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Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases
Author(s) -
Chen ShengSyan,
Chen IJu
Publication year - 2011
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2011.02251.x
Subject(s) - diversification (marketing strategy) , endogeneity , tobin's q , economics , investment (military) , asset (computer security) , value (mathematics) , monetary economics , enterprise value , investment decisions , financial economics , microeconomics , business , econometrics , finance , production (economics) , computer security , marketing , politics , political science , law , computer science , machine learning
We provide evidence that investment efficiency considerations are important in assessing changes in firm value surrounding asset purchases. We account for both the potential endogeneity in purchase decisions and the measurement error in Tobin's q . We find that post‐purchase, there are significant declines in both excess value and investment efficiency. This trend occurs primarily among those firms that demonstrate increased diversity following purchases. The change in excess value for diversity‐increasing buyers is positively related to the change in investment allocation surrounding the purchase.