Wealth Transfer or Wealth Destruction: Can Contingent-Claims Analysis Explain the Conglomerate Discount?
AbstractUsing US stock market panel data from 1999 to 2004 we examine the relationship between diversification effects predicted by the classic Merton (1970) model of capital structure on the one hand and the conglomerate discount resulting from comparable company analysis as initially proposed by Berger and Ofek (1995) on the other. Improving upon previous research, the explicit calculation of equity values by means of contingent-claims analysis allows us to capture the non-linear relationship predicted by theory in a random-effects regression model. Results support the hypothesis put forth by Mansi and Reeb (2002), according to which part of the observed discount is actually due to a transfer of wealth from shareholders to bondholders, in other words "reverse asset substitution." However, for the majority of firms in the sample, the destruction of shareholder value induced by risk reduction is much lower than commonly expected. Firms and investors alike should therefore be cautioned against attributing significant discounts to financial effects detached from underlying economic issues alone.
Download InfoIf 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.
Bibliographic InfoPaper provided by Department of Finance and Accounting, EUROPEAN BUSINESS SCHOOL (ebs), International University Schloß Reichartshausen in its series ebs Working Papers on Finance and Accounting with number 070101.
Length: 17 pages
Date of creation: 10 Jan 2007
Date of revision:
Contact details of provider:
Postal: Rheingaustraße 1, 65375 Oestrich-Winkel
Phone: +49 6723 69-0
Fax: +49 6723 69-133
Web page: http://www.ebs.edu/index.php?id=finacc
More information through EDIRC
contingent-claims analysis; diversification; conglomerate discount; reverse asset substitution;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-23 (All new papers)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster) The email address of this maintainer does not seem to be valid anymore. Please ask Webmaster to update the entry or send us the correct address.
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.