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Does Information Asymmetry Explain The Diversification Discount?

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

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.

Suggested Citation

  • Ronald W. Best & Charles W. Hodges & Bing-Xuan Lin, 2004. "Does Information Asymmetry Explain The Diversification Discount?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(2), pages 235-249.
  • Handle: RePEc:bla:jfnres:v:27:y:2004:i:2:p:235-249
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    References listed on IDEAS

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    1. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, pages 632-640.
    2. Jushan Bai & Robin L. Lumsdaine & James H. Stock, 1998. "Testing For and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 395-432.
    3. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, pages 75-107.
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    Cited by:

    1. Seung Han & William Moore & Yoon Shin & Seongbaek Yi, 2013. "Unsolicited Versus Solicited: Credit Ratings and Bond Yields," Journal of Financial Services Research, Springer;Western Finance Association, pages 293-319.
    2. David Hyland, 2008. "The long-run performance of diversifying firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, pages 294-310.
    3. 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.
    4. Chou, Ting-Kai & Cheng, Jia-Chi, 2012. "Credit ratings and excess value of diversification," Journal of Empirical Finance, Elsevier, pages 266-281.
    5. 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.
    6. Volkov, Nikanor I. & Smith, Garrett C., 2015. "Corporate diversification and firm value during economic downturns," The Quarterly Review of Economics and Finance, Elsevier, pages 160-175.
    7. Glaser, Markus & Müller, Sebastian, 2006. "Der Diversification Discount in Deutschland : existiert ein Bewertungsabschlag für diversifizierte Unternehmen?," Papers 06-13, Sonderforschungsbreich 504.
    8. Pasquale Massimo Picone & Giovanni Battista Dagnino, 2016. "Revamping research on unrelated diversification strategy: perspectives, opportunities and challenges for future inquiry," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 413-445, September.

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