Corporate Diversification: What Gets Discounted?

Authors: Mansi, Sattar A.¹; Reeb, David M.²

Source: The Journal of Finance, Volume 57, Number 5, October 2002 , pp. 2167-2183(17)

Publisher: Blackwell Publishing

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Abstract:

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.

Document Type: Original article

DOI: 10.1111/0022-1082.00492

Affiliations: 1: Pamplin College of Business, Virginia Tech, 2: Culverhouse College of Commerce, University of Alabama

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