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Why Firms Diversify: An Empirical Examination

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  • David Hyland
  • J David Diltz
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    Abstract

    There is substantial evidence to suggest that the market placed a lower value on diversified firms than on specialized firms during the 1980s, yet many firms diversified anyway. This article addresses why firms diversify in the first place. We use the Compustat Industry Segment database in order to identify and analyze a sample of firms that begin the study period as single-segment entities and then subsequently choose to diversify. We find evidence to support two of three possible agency cost hypotheses. Not all reported segment changes represent true economic events. Moreover, analysis of the differences between true economic diversifiers and firms whose segment change represents a nonsubstantive reporting change suggests that inadvertent inclusion of the latter in diversification studies may bias results, especially with respect to firm liquidity and q.

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    Bibliographic Info

    Article provided by Financial Management Association in its journal Financial Management.

    Volume (Year): 31 (2002)
    Issue (Month): 1 (Spring)
    Pages:

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    Handle: RePEc:fma:fmanag:diltz02

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    Cited by:
    1. Glaser, Markus & Müller, Sebastian, 2006. "Der Diversification Discount in Deutschland: Existiert ein Bewertungsabschlag für diversifizierte Unternehmen?," Sonderforschungsbereich 504 Publications 06-13, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
    2. Chen, Sheng-Syan & Chen, I-Ju, 2012. "Corporate governance and capital allocations of diversified firms," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 395-409.
    3. Kim, Young Sang & Mathur, Ike, 2008. "The impact of geographic diversification on firm performance," International Review of Financial Analysis, Elsevier, vol. 17(4), pages 747-766, September.
    4. James Chong & Alexandra Krystalogianni & Simon Stevenson, 2012. "Dynamic correlations between REIT sub-sectors and the implications for diversification," Applied Financial Economics, Taylor & Francis Journals, vol. 22(13), pages 1089-1109, July.
    5. James Chong & Alexandra Krystalogianni & Simon Stevenson, . "Dynamic Correlations across REIT Sub-Sectors," Real Estate & Planning Working Papers rep-wp2011-07, Henley Business School, Reading University.
    6. Jiraporn, Pornsit & Kim, Young Sang & Davidson, Wallace N. & Singh, Manohar, 2006. "Corporate governance, shareholder rights and firm diversification: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 947-963, March.
    7. Dos Santos, Marcelo B. & Errunza, Vihang R. & Miller, Darius P., 2008. "Does corporate international diversification destroy value? Evidence from cross-border mergers and acquisitions," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2716-2724, December.
    8. Jiraporn, Pornsit & Kim, Young Sang & Mathur, Ike, 2008. "Does corporate diversification exacerbate or mitigate earnings management?: An empirical analysis," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 1087-1109, December.
    9. Doukas, John A. & Kan, Ozgur B., 2008. "Investment decisions and internal capital markets: Evidence from acquisitions," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1484-1498, August.
    10. Imen Khanchel El Mehdi, 2014. "Accrual and cash flow anomalies in diversified firms: Impact of segment portfolio management," Working Papers 2014-076, Department of Research, Ipag Business School.
    11. Deng, Saiying (Esther) & Elyasiani, Elyas & Mao, Connie X., 2007. "Diversification and the cost of debt of bank holding companies," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2453-2473, August.
    12. Gao, Wenlian & Ng, Lilian & Wang, Qinghai, 2008. "Does geographic dispersion affect firm valuation?," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 674-687, December.
    13. Benefield, Justin D. & Anderson, Randy I. & Zumpano, Leonard V., 2009. "Performance differences in property-type diversified versus specialized real estate investment trusts (REITs)," Review of Financial Economics, Elsevier, vol. 18(2), pages 70-79, April.
    14. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2013. "Corporate diversification and firm value: a survey of recent literature," Financial Markets and Portfolio Management, Springer, vol. 27(2), pages 187-215, June.
    15. Subramaniam, Venkat & Tang, Tony T. & Yue, Heng & Zhou, Xin, 2011. "Firm structure and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 759-773, June.
    16. Chen, Chiung-Jung & Yu, Chwo-Ming Joseph, 2012. "Managerial ownership, diversification, and firm performance: Evidence from an emerging market," International Business Review, Elsevier, vol. 21(3), pages 518-534.
    17. Batiz-Lazo, Bernardo & Blanco Mendialdua, Ana & Urionabarrenetxea Zabalandikoetxea, Sara, 2001. "Growth of the Spanish Multinational in Latin America during the 1990s," MPRA Paper 929, University Library of Munich, Germany, revised Dec 2005.
    18. Kevin Campbell & Antonio Mínguez-Vera, 2008. "Gender Diversity in the Boardroom and Firm Financial Performance," Journal of Business Ethics, Springer, vol. 83(3), pages 435-451, December.
    19. Timothy B. Folta & Jonathan P. O'Brien, 2008. "Determinants of firm-specific thresholds in acquisition decisions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(2-3), pages 209-225.
    20. Stowe, John D. & Xing, Xuejing, 2006. "Can growth opportunities explain the diversification discount?," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 783-796, September.
    21. Ekaterina Emm & Jayant Kale, 2006. "Efficiency Implications of Corporate Diversification: Evidence from Micro Data," Working Papers 06-26, Center for Economic Studies, U.S. Census Bureau.
    22. David Hyland, 2008. "The long-run performance of diversifying firms," Journal of Economics and Finance, Springer, vol. 32(3), pages 294-310, July.
    23. repec:hal:journl:halshs-00155762 is not listed on IDEAS
    24. Marinelli, Federico, 2008. "Persistence of outstanding performance and shareholder value among diversified firms: The impact of past performance, efficient internal capital market, and relatedness of business segments," IESE Research Papers D/758, IESE Business School.

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