Corporate diversification
By G. Smith, Jeffrey M. Coy. Review of Accounting and Finance, 2018
271 citations recorded by the source corpus.
Purpose The purpose of this study is to compare two theories that relate the proportion of diversified firms in the economy and the implied discount for diversified firms: the first is a real-options model predicting a positive relationship between the discount and management’s choice to operate a diversified firm; the second is based on catering theory, in which a negative relationship is predicted, as management is attentive to investor preference concerning diversified firms. Design/methodology/approach This study proposes a new aggregate measure of the diversification discount. The authors’ measure allows for decomposition of the discount into firm-level mispricing, industry-level mispricing and long-run fundamental value components. Findings Results support a catering theory of diversification. The discount appears to be the result of firm-level mispricing. Thus, providing an explanation for why, in light of the observed discount, a large number of diversified firms persist. Originality/value To the authors’ knowledge, this is the first study to provide evidence that firm-level mispricing may drive the observed diversification discount.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/56cebb5b1c68652274f936cebe44d5250e54369a
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Citations in the corpus
- Does the Diversification–Firm Performance Relationship Change Over Time? A Meta‐Analytical Review (2018, unknown): “According to agency-theoretic (e.g., Kogut et al., 1992; Montgomery, 1994) and institutional (e.g., Lee et al., 2008; Wan, 2005; Wan and Hoskisson, 2003) perspectives, increasing shareholder power, a more active market for corporate control, and a liberalized market environment have curbed the…”
- The export performance of emerging economy firms: The influence of firm capabilities and institutional environments (2018, background): “, know-how, production) towards expanding sales abroad (Montgomery, 1994).”