Advanced Search
MyIDEAS: Login to save this paper or follow this series

Efficiency Implications of Corporate Diversification: Evidence from Micro Data

Contents:

Author Info

  • Ekaterina Emm
  • Jayant Kale
Registered author(s):

    Abstract

    In this study, we contribute to the ongoing research on the rationales for corporate diversification. Using plant-level data from the U.S. Census Bureau, we examine whether combining several lines of business in one entity leads to increased productive efficiency. Studying the direct effect of diversification on efficiency allows us to discern between two major theories of corporate diversification: the synergy hypothesis and the agency cost hypothesis. To measure productive efficiency, we employ a non-parametric approach—a test based on Varian’s Weak Axiom of Profit Maximization (WAPM). This method has several advantages over other conventional measures of productive efficiency. Most importantly, it allows one to perform the efficiency test without relying on assumptions about the functional form of the underlying production function. To the best of our knowledge, this study is the first application of the WAPM test to a large sample of non-financial firms. The study provides evidence that business segments of diversified firms are more efficient compared to single-segment firms in the same industry. This finding suggests that the existence of the so-called ‘diversification discount’ cannot be explained by efficiency differences between multi-segment and focused firms. Furthermore, more efficient segments tend to be vertically integrated with others segments in the same firm and to have been added through acquisitions rather than grown internally. Overall, the results of this study indicate that corporate diversification is value-enhancing, and that it is not necessarily driven by managers’ pursuit of their private benefits.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: ftp://ftp2.census.gov/ces/wp/2006/CES-WP-06-26.pdf
    File Function: First version, 2006
    Download Restriction: no

    Bibliographic Info

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 06-26.

    as in new window
    Length: 69 pages
    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:cen:wpaper:06-26

    Contact details of provider:
    Postal: 4600 Silver Hill Road, Washington, DC 20233
    Phone: (301) 763-6460
    Fax: (301) 763-5935
    Email:
    Web page: http://www.census.gov/ces
    More information through EDIRC

    Related research

    Keywords: Restructuring; Diversification; Efficiency;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Frank R. Lichtenberg, 1990. "Industrial De-Diversification and its Consequences for Productivity," NBER Working Papers 3231, National Bureau of Economic Research, Inc.
    2. David Hyland & J David Diltz, 2002. "Why Firms Diversify: An Empirical Examination," Financial Management, Financial Management Association, vol. 31(1), Spring.
    3. John, Kose & Ofek, Eli, 1995. "Asset sales and increase in focus," Journal of Financial Economics, Elsevier, vol. 37(1), pages 105-126, January.
    4. J. Bradford Jensen & Robert H. McGuckin & Kevin J. Stiroh, 2001. "The Impact Of Vintage And Survival On Productivity: Evidence From Cohorts Of U.S. Manufacturing Plants," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 323-332, May.
    5. John R. Graham & Michael L. Lemmon & Jack G. Wolf, 2002. "Does Corporate Diversification Destroy Value?," Journal of Finance, American Finance Association, vol. 57(2), pages 695-720, 04.
    6. Teece, David J., 1980. "Economies of scope and the scope of the enterprise," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 223-247, September.
    7. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
    8. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, 08.
    9. John G. Matsusaka, 1993. "Takeover Motives during the Conglomerate Merger Wave," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 357-379, Autumn.
    10. Sam Peltzman, 1977. "The Gains and Losses From Industrial Concentration," NBER Working Papers 0163, National Bureau of Economic Research, Inc.
    11. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
    12. McGuckin, Robert H & Nguyen, Sang V & Andrews, Stephen H, 1992. "The Relationships among Acquiring and Acquired Firms' Product Lines," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 477-502, October.
    13. Daley, Lane & Mehrotra, Vikas & Sivakumar, Ranjini, 1997. "Corporate focus and value creation Evidence from spinoffs," Journal of Financial Economics, Elsevier, vol. 45(2), pages 257-281, August.
    14. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    15. Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu & Christine Zulehner, 2001. "The Effects of Mergers: An International Comparison," CIG Working Papers FS IV 01-21, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    16. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
    17. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
    18. Chevalier Judith, 2004. "What Do We Know About Cross-subsidization? Evidence from Merging Firms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-29, April.
    19. Vojislav Maksimovic & Gordon Phillips, 2002. "Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence," Journal of Finance, American Finance Association, vol. 57(2), pages 721-767, 04.
    20. Frank R. Lichtenberg & Donald Siegel, 1987. "Productivity and Changes in Ownership of Manufactoring Plants," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 643-684.
    21. Antoinette Schoar, 2002. "Effects of Corporate Diversification on Productivity," Journal of Finance, American Finance Association, vol. 57(6), pages 2379-2403, December.
    22. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    23. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
    24. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    25. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
    26. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    27. Joseph P. H. Fan & Vidhan K. Goyal, 2006. "On the Patterns and Wealth Effects of Vertical Mergers," The Journal of Business, University of Chicago Press, vol. 79(2), pages 877-902, March.
    28. Fried, Harold O. & Lovell, C. A. Knox & Schmidt, Shelton S. (ed.), 1993. "The Measurement of Productive Efficiency: Techniques and Applications," OUP Catalogue, Oxford University Press, number 9780195072181, September.
    29. Tauer, Loren W. & Stefanides, Zdenko, 1997. "Success in Maximizing Profits and Reasons for Profit Deviation on Dairy Farms," Working Papers 127827, Cornell University, Department of Applied Economics and Management.
    30. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-97, May.
    31. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-37, May.
    32. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    33. Sattar A. Mansi & David M. Reeb, 2002. "Corporate Diversification: What Gets Discounted?," Journal of Finance, American Finance Association, vol. 57(5), pages 2167-2183, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:cen:wpaper:06-26. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fariha Kamal).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.