IDEAS home Printed from https://ideas.repec.org/a/eee/econom/v213y2019i1p92-120.html
   My bibliography  Save this article

What do mean impacts miss? Distributional effects of corporate diversification

Author

Listed:
  • Xiao, Zhijie
  • Xu, Lan

Abstract

Corporate diversification is one of the most debated topics in finance over the past two decades. While it is widely believed that there exists a discount in the stock market valuation of conglomerate firms, the extant research based on least squares methods points to different directions. We argue that the existing empirical analyses ignore some important data features, especially cross sectional heterogeneity, predicted by both theories and casual observations on corporate diversification, and thus cannot provide a complete picture of the diversification discount. Using a quantile regression analysis on U.S. public firms, we investigate the importance of heterogeneity of diversification as well as other firm characteristics. Estimated quantile treatment effects exhibit substantial heterogeneity as predicted. Thus mean impacts miss a great deal. We also tie back differences in the effect of diversification in high-valued and low-valued firms to observable agency characteristics; the most interesting finding is that CEOs seem to play vastly different roles in high-valued and low-valued firms. We conclude that the effect of diversification is likely more varied and more extensive than has been recognized.

Suggested Citation

  • Xiao, Zhijie & Xu, Lan, 2019. "What do mean impacts miss? Distributional effects of corporate diversification," Journal of Econometrics, Elsevier, vol. 213(1), pages 92-120.
  • Handle: RePEc:eee:econom:v:213:y:2019:i:1:p:92-120
    DOI: 10.1016/j.jeconom.2019.04.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304407619300624
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eisfeldt, Andrea L. & Kuhnen, Camelia M., 2013. "CEO turnover in a competitive assignment framework," Journal of Financial Economics, Elsevier, vol. 109(2), pages 351-372.
    2. Hund, John & Monk, Donald & Tice, Sheri, 2010. "Uncertainty about average profitability and the diversification discount," Journal of Financial Economics, Elsevier, vol. 96(3), pages 463-484, June.
    3. Marianne P. Bitler & Jonah B. Gelbach & Hilary W. Hoynes, 2006. "What Mean Impacts Miss: Distributional Effects of Welfare Reform Experiments," American Economic Review, American Economic Association, vol. 96(4), pages 988-1012, September.
    4. Matsusaka, John G. & Nanda, Vikram, 2002. "Internal Capital Markets and Corporate Refocusing," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 176-211, April.
    5. Cláudia Custódio, 2014. "Mergers and Acquisitions Accounting and the Diversification Discount," Journal of Finance, American Finance Association, vol. 69(1), pages 219-240, February.
    6. Kato, Kengo & F. Galvao, Antonio & Montes-Rojas, Gabriel V., 2012. "Asymptotics for panel quantile regression models with individual effects," Journal of Econometrics, Elsevier, vol. 170(1), pages 76-91.
    7. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    8. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-1280, December.
    9. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    10. Stein, Jeremy C, 1997. "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
    11. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    12. Boot, Arnoud W A, 1992. "Why Hang on to Losers? Divestitures and Takeovers," Journal of Finance, American Finance Association, vol. 47(4), pages 1401-1423, September.
    13. Galvao, Antonio F. & Wang, Liang, 2015. "Efficient minimum distance estimator for quantile regression fixed effects panel data," Journal of Multivariate Analysis, Elsevier, vol. 133(C), pages 1-26.
    14. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
    15. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, vol. 52(1), pages 135-160, March.
    16. Graham, Bryan S. & Hahn, Jinyong & Poirier, Alexandre & Powell, James L., 2018. "A quantile correlated random coefficients panel data model," Journal of Econometrics, Elsevier, vol. 206(2), pages 305-335.
    17. Rebecca N. Hann & Maria Ogneva & Oguzhan Ozbas, 2013. "Corporate Diversification and the Cost of Capital," Journal of Finance, American Finance Association, vol. 68(5), pages 1961-1999, October.
    18. Galvao Jr., Antonio F., 2011. "Quantile regression for dynamic panel data with fixed effects," Journal of Econometrics, Elsevier, vol. 164(1), pages 142-157, September.
    19. Ahn, Seoungpil & Denis, David J., 2004. "Internal capital markets and investment policy: evidence from corporate spinoffs," Journal of Financial Economics, Elsevier, vol. 71(3), pages 489-516, March.
    20. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, September.
    21. Hoechle, Daniel & Schmid, Markus & Walter, Ingo & Yermack, David, 2012. "How much of the diversification discount can be explained by poor corporate governance?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 41-60.
    22. Ivan A. Canay, 2011. "A simple approach to quantile regression for panel data," Econometrics Journal, Royal Economic Society, vol. 14(3), pages 368-386, October.
    23. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    24. Philip G. Berger & Rebecca Hann, 2003. "The Impact of SFAS No. 131 on Information and Monitoring," Journal of Accounting Research, Wiley Blackwell, vol. 41(2), pages 163-223, May.
    25. Jay Dahya & John J. McConnell & Nickolaos G. Travlos, 2002. "The Cadbury Committee, Corporate Performance, and Top Management Turnover," Journal of Finance, American Finance Association, vol. 57(1), pages 461-483, February.
    26. Koenker, Roger, 2004. "Quantile regression for longitudinal data," Journal of Multivariate Analysis, Elsevier, vol. 91(1), pages 74-89, October.
    27. Mark R. Huson & Robert Parrino & Laura T. Starks, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
    28. Vojislav Maksimovic & Gordon M. Phillips, 2013. "Conglomerate Firms, Internal Capital Markets, and the Theory of the Firm," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 225-244, November.
    29. Joshua D. Angrist, 2004. "Treatment effect heterogeneity in theory and practice," Economic Journal, Royal Economic Society, vol. 114(494), pages 52-83, March.
    30. 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.
    31. Victor Chernozhukov & Iván Fernández‐Val & Jinyong Hahn & Whitney Newey, 2013. "Average and Quantile Effects in Nonseparable Panel Models," Econometrica, Econometric Society, vol. 81(2), pages 535-580, March.
    32. Juan Santalo & Manuel Becerra, 2008. "Competition from Specialized Firms and the Diversification–Performance Linkage," Journal of Finance, American Finance Association, vol. 63(2), pages 851-883, April.
    33. repec:oup:revfin:v:29:y:2016:i:12:p:3354-3393. is not listed on IDEAS
    34. Victor Chernozhukov & Christian Hansen, 2004. "The Effects of 401(K) Participation on the Wealth Distribution: An Instrumental Quantile Regression Analysis," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 735-751, August.
    35. Chen, Huaizhi & Cohen, Lauren & Lou, Dong, 2016. "Industry window dressing," LSE Research Online Documents on Economics 70650, London School of Economics and Political Science, LSE Library.
    36. Rosen, Adam M., 2012. "Set identification via quantile restrictions in short panels," Journal of Econometrics, Elsevier, vol. 166(1), pages 127-137.
    37. Gönül Çolak & Toni M. Whited, 2007. "Spin-offs, Divestitures, and Conglomerate Investment," Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 557-595.
    38. Servaes, Henri, 1996. "The Value of Diversification during the Conglomerate Merger Wave," Journal of Finance, American Finance Association, vol. 51(4), pages 1201-1225, September.
    39. Antonio F. Galvao & Carlos Lamarche & Luiz Renato Lima, 2013. "Estimation of Censored Quantile Regression for Panel Data With Fixed Effects," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 108(503), pages 1075-1089, September.
    40. Yuhai Xuan, 2009. "Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4919-4948, December.
    41. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
    42. Belén Villalonga, 2004. "Does Diversification Cause the "Diversification Discount"?," Financial Management, Financial Management Association, vol. 33(2), Summer.
    43. Wei Jiang & Tao Li & Danqing Mei & Randall Thomas, 2016. "Appraisal: Shareholder Remedy or Litigation Arbitrage?," Journal of Law and Economics, University of Chicago Press, vol. 59(3), pages 697-729.
    44. Marianne P. Bitler & Jonah B. Gelbach & Hilary W. Hoynes, 2017. "Can Variation in Subgroups' Average Treatment Effects Explain Treatment Effect Heterogeneity? Evidence from a Social Experiment," The Review of Economics and Statistics, MIT Press, vol. 99(4), pages 683-697, July.
    45. Amy Dittmar & Anil Shivdasani, 2003. "Divestitures and Divisional Investment Policies," Journal of Finance, American Finance Association, vol. 58(6), pages 2711-2744, December.
    46. Huaizhi Chen & Lauren Cohen & Dong Lou, 2016. "Industry Window Dressing," Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3354-3393.
    47. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    48. Lamarche, Carlos, 2010. "Robust penalized quantile regression estimation for panel data," Journal of Econometrics, Elsevier, vol. 157(2), pages 396-408, August.
    49. Murillo Campello, 2002. "Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy," Journal of Finance, American Finance Association, vol. 57(6), pages 2773-2805, December.
    50. Matsusaka, John G, 2001. "Corporate Diversification, Value Maximization, and Organizational Capabilities," The Journal of Business, University of Chicago Press, vol. 74(3), pages 409-431, July.
    51. 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, April.
    52. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 901-932.
    53. Richard Borghesi & Joel Houston & Andy Naranjo, 2007. "Value, Survival, and the Evolution of Firm Organizational Structure," Financial Management, Financial Management Association International, vol. 36(3), pages 5-31, September.
    54. Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, vol. 54(6), pages 2215-2239, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Olga S. Kirichenko & Alexey A. Komzolov & Yulia A. Nazarova & Natalya S. Shcherbakova & Tatiana V. Kirichenko, 2020. "Diversification of Russian Oil and Gas Upstream Companies," International Journal of Energy Economics and Policy, Econjournals, vol. 10(3), pages 112-118.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Kim, Sehoon, 2020. "Disappearing Discounts: Hedge Fund Activism in Conglomerates," MPRA Paper 100876, University Library of Munich, Germany.
    3. 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;Swiss Society for Financial Market Research, vol. 27(2), pages 187-215, June.
    4. Andreou, Panayiotis C. & Doukas, John A. & Koursaros, Demetris & Louca, Christodoulos, 2019. "Valuation effects of overconfident CEOs on corporate diversification and refocusing decisions," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 182-204.
    5. Hovakimian, Gayané, 2016. "Excess value and restructurings by diversified firms," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 1-19.
    6. Patrick Bielstein & Mario Fischer & Christoph Kaserer, 2018. "The cost of capital effect of M&A transactions: Disentangling coinsurance from the diversification discount," European Financial Management, European Financial Management Association, vol. 24(4), pages 650-679, September.
    7. Siraj, Ibrahim & Hassan, M. Kabir & Maroney, Neal, 2020. "Product demand sensitivity and the corporate diversification discount," Journal of Financial Stability, Elsevier, vol. 48(C).
    8. Jandik, Tomas & Makjija, Anil K., 2004. "Can Diversification Create Value? Evidence from the Electric Utility Industry," Working Paper Series 2005-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    9. Huang, Sheng, 2014. "Managerial expertise, corporate decisions and firm value: Evidence from corporate refocusing," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 348-375.
    10. Hoechle, Daniel & Schmid, Markus & Walter, Ingo & Yermack, David, 2012. "How much of the diversification discount can be explained by poor corporate governance?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 41-60.
    11. Volkov, Nikanor I. & Smith, Garrett C., 2015. "Corporate diversification and firm value during economic downturns," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 160-175.
    12. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - Leibniz Information Centre for Economics.
    13. Glaser, Markus & Müller, Sebastian, 2006. "Der Diversification Discount in Deutschland : existiert ein Bewertungsabschlag für diversifizierte Unternehmen?," Papers 06-13, Sonderforschungsbreich 504.
    14. Richard Borghesi & Joel Houston & Andy Naranjo, 2007. "Value, Survival, and the Evolution of Firm Organizational Structure," Financial Management, Financial Management Association International, vol. 36(3), pages 5-31, September.
    15. Ekkayokkaya, Manapol & Paudyal, Krishna, 2015. "A trade-off in corporate diversification," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 275-292.
    16. 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.
    17. Lee, Bong Soo & Li, Ming-Yuan Leon, 2012. "Diversification and risk-adjusted performance: A quantile regression approach," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2157-2173.
    18. Gönül Çolak, 2010. "Diversification, Refocusing and Firm Value," European Financial Management, European Financial Management Association, vol. 16(3), pages 422-448, June.
    19. Galvao, Antonio F. & Gu, Jiaying & Volgushev, Stanislav, 2020. "On the unbiased asymptotic normality of quantile regression with fixed effects," Journal of Econometrics, Elsevier, vol. 218(1), pages 178-215.
    20. Yasser Alhenawi & Martha Stilwell, 2017. "Value creation and the probability of success in merger and acquisition transactions," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1041-1085, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:213:y:2019:i:1:p:92-120. 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: (Nithya Sathishkumar). General contact details of provider: http://www.elsevier.com/locate/jeconom .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.