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Does Information Asymmetry Explain The Diversification Discount?
Author(s) -
Best Ronald W.,
Hodges Charles W.,
Lin BingXuan
Publication year - 2004
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2004.t01-1-00081.x
Subject(s) - diversification (marketing strategy) , information asymmetry , asymmetry , profitability index , economics , econometrics , leverage (statistics) , enterprise value , financial economics , monetary economics , microeconomics , business , statistics , mathematics , finance , physics , quantum mechanics , marketing
We examine the diversification discount while controlling for differences in information asymmetry between diversified and nondiversified firms. We show that both diversified and nondiversified firms with higher levels of information asymmetry have discounted firm values relative to firms with lower levels of information asymmetry, although a diversification discount remains at all levels of information asymmetry. Fixed‐effect Fama‐MacBeth regressions confirm the existence of a statistically significant relation between information asymmetry proxies and excess value, but they also show that a significant diversification discount remains after controlling for differences in information asymmetry and other firm characteristics discussed in earlier studies (e.g., size, profitability, leverage, and capital constraint).