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The impact of conglomeration on the option value of equity

  • Grass, Gunnar
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    Using contingent claims analysis, I quantify the effect of risk-reducing corporate diversification on the value of equity as a call option on firm assets. The impact of conglomeration on firm risk is heavily conditioned on firm size. In contrast to small firms, the risk of large firms does not decline with increasing conglomeration. Accounting for this effect, the expected equity discount is much lower than commonly assumed and can even turn into a premium if the path dependency of equity is incorporated. My results stand in direct contrast to those of Mansi and Reeb (2002) and caution against using asset substitution as a qualitative argument for explaining economy-wide value phenomena.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-50G697D-2/2/a2e007499d114e030da10af15f2203a5
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 12 (December)
    Pages: 3010-3024

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:12:p:3010-3024
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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