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Does Information Asymmetry Explain The Diversification Discount?

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  • Ronald W. Best
  • Charles W. Hodges
  • Bing-Xuan Lin
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    Abstract

    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). 2004 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 27 (2004)
    Issue (Month): 2 ()
    Pages: 235-249

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    Handle: RePEc:bla:jfnres:v:27:y:2004:i:2:p:235-249

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    Cited by:
    1. Chou, Ting-Kai & Cheng, Jia-Chi, 2012. "Credit ratings and excess value of diversification," Journal of Empirical Finance, Elsevier, Elsevier, vol. 19(2), pages 266-281.
    2. Nippa, Michael, 2011. "Zur Notwendigkeit des Corporate Portfolio Management: Eine Würdigung der wissenschaftlichen Forschung der letzten vier Jahrzehnte," Freiberg Working Papers 2011,02, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    3. Seung Han & William Moore & Yoon Shin & Seongbaek Yi, 2013. "Unsolicited Versus Solicited: Credit Ratings and Bond Yields," Journal of Financial Services Research, Springer, Springer, vol. 43(3), pages 293-319, June.
    4. David Hyland, 2008. "The long-run performance of diversifying firms," Journal of Economics and Finance, Springer, Springer, vol. 32(3), pages 294-310, July.
    5. Glaser, Markus & Müller, Sebastian, 2006. "Der Diversification Discount in Deutschland: Existiert ein Bewertungsabschlag für diversifizierte Unternehmen?," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim 06-13, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.

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