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Corporate Diversification: What Gets Discounted?

  • Sattar A. Mansi

    (Pamplin College of Business, Virginia Tech,)

  • David M. Reeb

    (Culverhouse College of Commerce, University of Alabama)

Prior literature finds that diversified firms sell at a discount relative to the sum of the imputed values of their business segments. We explore this documented discount and argue that it stems from risk-reducing effects of corporate diversification. Consistent with this risk-reduction hypothesis, we find that (a) shareholder losses in diversification are a function of firm leverage, (b) all equity firms do not exhibit a diversification discount, and (c) using book values of debt to compute excess value creates a downward bias for diversified firms. Overall, the results indicate that diversification is insignificantly related to excess firm value. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 5 (October)
Pages: 2167-2183

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2167-2183
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