Growth opportunities and the effect of corporate diversification on firm Excess value

Document Type : Original Article

Authors

1 SBU

2 Assistant Prof. of Accounting

3 Phd of Faculty of Management

Abstract

The main purpose of this research is to study the impact of corporate diversification on firm’s excess value by including opportunities among firms listed in Tehran Stock Exchange. Excess value as an independend variable was measured by the natural logaritm of firm’s actual value (sum of market stock value and debt book value) to its imputed value. Diversified firms imputed value was calculate the imputed value of each segment by multiplying the median ratio, for single-segment firms in the same industry, of total capital to sales by the segment’s level of the accounting item. To measure independent variable (diversification), We use three indexes including Entropy, Herfindal and number of sections. Growth opportunities was measured by Q Tobin’s ratio. The initial sample of this research includes 191 firms listed by Tehran Stock Exchange (55 diversified firms and 136 single-business firms) for the period of 2013 to 2017.
Regression results showed that diversification has a significant impact on excess value. All three diversification indexes including Entropy, Herfindal and number sections have positive impact on excess value. Also, the research results indicate the moderating role of growth opportunities variable on the relationship between diversification and excess value.

References

  1. Adam, T., & Goyal, V. K. (2008). The investment opportunity set and its proxy variables. The Journal of Financial Research, 31(1): 41-63.
  2. Adkins, L. C., & Hill, R. C. (2011). Using Stata For Principles of Econometrics. 4th Edition, John Wiley & Sons, INC, p: 533.
  3. Baron, R., & Kenny, D. (1986). The moderator–mediator variable distinction in social psychological research: conceptual, strategic and statistical considerations. Journal of Personality and Social Psychology, 51 (6): 1173-1182.
  4. Berger, P. G., & Ofek, E. (1995). Diversiï‌cation’s effect on ï‌rm value. Journal of Financial Economics, 37(1): 39-65.
  5. Campa, J. M., & Kedia, S. (2002). Explaining the diversiï‌cation discount. The Journal of Finance, 57 (4): 1731-1762.
  6. Cao, C., Simin, T., & Zhao, J. (2008). Can growth options explain the trend in idiosyncraticrisk?. The Review of Financial Studies, 21(6): 2599-2633.
  7. Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of Tobin’s q. Financial Management, 23: 70-74.
  8. Danbolt, J., Hirst, I., & Jones, E. (2002). Measuring growth opportunities. Applied Financial Economics, 12: 203-212.
  9. de Andres, P., de la Fuente, G., & Velasco, P. (2014). Growth opportunities and the effect of corporate diversification on value. The Spanish Review of Financial Economics, 12: 72-81.
  10. Denis, D. J., Denis, D., & Yost, K. (2002). Global diversification, industrial diversification, and firm value. Journal of Finance, 57(5): 1951-1979.
  11. Elsas, R., Hackethal, A., & Holzhäuser, M. (2010). The anatomy of bank diversiï‌cation. Journal of Banking & Finance, 34 (6): 1274-1287.
  12. Ferris, S. P., Sen, N., Lim, C. Y., & Yeo, G. (2002). Corporate focus versus diversification: the role of growth opportunities and cash flow. Journal of International Financial Markets Institutions and Money, 12(3): 231-252.
  13. Glaser. M., Muller. S. (2010). Is the diversiï‌cation discount caused by the book value bias of debt?. Journal of Banking & Finance, 34, 2307-2317.
  14. Gomes, J., & Livdan, D. (2004). Optimal diversification: Reconciling theory and evidence. The Journal of Finance, 59(2): 507-535.
  15. Graham, J., Lemmon, M., & Wolf, J. (2002). Does corporate diversification destroy value?. Journal of Finance, 57(2): 695-720.
  16. Heckman, J., 1979. Sample selection bias as a speciï‌cation error. Econometrica 47(1), 153–161.
  17. Hoechle, D., Schmid, M., Walter, I., & Yermarck, D. (2012). How much of the diversification discount can be explained by poor corporate governance?. Journal of Financial Economics, 103(1): 41-60.
  18. Hyland, D., & Diltz, J. (2002). Why firms diversify: an empirical examination. Financial Management, 31: 51-81.
  19. Klier, D. O. (2008). Managing Diversified Portfolios: What Multi-Business Firms Can Learn From Private Equity. Dissertation, Technical University of Dortmund, Springer Series in Contributions to Management Science.
  20. Lang, L., & Stulz, R. (1994). Tobin’s q, corporate diversification and firm performance. Journal of Political Economy, 102(6): 1248-1280.
  21. Mansi, S. A. & Reeb, D. M. (2002). Corporate diversification: What gets discounted?. The Journal of Finance, 57(5): 2167-2183.
  22. Martin, J. D., & Sayrak, A. (2003). Corporate diversification and shareholder value: A survey of recent literature. Journal of Corporate Finance, 9(1):37-57.
  23. Miller, D. J. (2004). Firms’ technological resources and the performance effects of diversification: a longitudinal study. Strategic Management Journal, 25(11): 1097-1119.
  24. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2): 147-175.
  25. Ramanujam, V. & Varadarajan, P. (1989). Research on corporate diversification: A synthesis. Strategic Management Journal, 10(6): 523-551.
  26. Rumelt, R. P. (1982). Diversification strategy and profitability. Strategic Management Journal, 3(4): 359-369.
  27. Santalo, J., & Becerra, M. (2008). Competition from specialized ï‌rms and thediversiï‌cation-performance linkage. The Journal of Finance, 63(2): 851-883.
  28. Servaes, H. (1996). The value of diversification during the conglomerate merger wave. The Journal of Finance, 51(4): 1201-1225.
  29. Stowe, J. & Xing, X. (2006). Can growth opportunities explain the diversiï‌cation discount?. Journal of Corporate Finance, 12 (4): 783-796.
  30. Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1): 15-29.
  31. Villalonga, B. (2003). Research roundtable discussion: The diversification discount. Harvard Business School, case and teaching paper series 2003 (April).
  32. Villalonga, B. (2004a). Diversification discount or premium? New evidence from the Business Information Tracking Series. The Journal of Finance, 59(2): 479-506.
  33. Villalonga, B. (2004b). Does diversification cause the diversification discount?. Financial Management, 33(2): 5-27.

Files

Share

How to cite

Statistics