IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Diversification and risk-adjusted performance: A quantile regression approach

Listed author(s):
  • Lee, Bong Soo
  • Li, Ming-Yuan Leon
Registered author(s):

    The effect of diversification on firm performance has been debated. We reexamine the effect using a sample of 44,248 observations of non-financial US firms for the 1997–2009 period employing the quantile regression approach. Our empirical results show that the effect of diversification on firm performance is not homogeneous across various quantile levels: the diversification discount (premium) shows up in firms with high (low) RoE quantiles. Further, we find that diversification affects firm risk as well. Therefore, we consider a risk-adjusted performance measure and find that both diversification discount and premium disappear, which is consistent with the risk-return trade-off principle.

    If 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.

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612000829
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 7 ()
    Pages: 2157-2173

    as
    in new window

    Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:2157-2173
    DOI: 10.1016/j.jbankfin.2012.03.020
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Glaser, Markus & Müller, Sebastian, 2010. "Is the diversification discount caused by the book value bias of debt?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2307-2317, October.
    2. 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.
    3. A Gosling & Stephen Machin, 1995. "The Changing Distribution of Male Wages in the UK," CEP Discussion Papers dp0271, Centre for Economic Performance, LSE.
    4. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," CEI Working Paper Series 2009-09, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    5. Li, Ming-Yuan Leon & Miu, Peter, 2010. "A hybrid bankruptcy prediction model with dynamic loadings on accounting-ratio-based and market-based information: A binary quantile regression approach," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 818-833, September.
    6. Gilbert W. Bassett Jr. & Hsiu-Lang Chen, 2001. "Portfolio style: Return-based attribution using quantile regression," Empirical Economics, Springer, vol. 26(1), pages 293-305.
    7. Anthony, Joseph H. & Ramesh, K., 1992. "Association between accounting performance measures and stock prices : A test of the life cycle hypothesis," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 203-227, August.
    8. Cheng, Shijun, 2008. "Board size and the variability of corporate performance," Journal of Financial Economics, Elsevier, vol. 87(1), pages 157-176, January.
    9. Raghuram Rajan & Henry Servaes & Luigi Zingales, "undated". "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CRSP working papers 463, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    10. Meligkotsidou, Loukia & Vrontos, Ioannis D. & Vrontos, Spyridon D., 2009. "Quantile regression analysis of hedge fund strategies," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 264-279, March.
    11. Robert Engle & Simone Manganelli, 2000. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Econometric Society World Congress 2000 Contributed Papers 0841, Econometric Society.
    12. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
    13. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    14. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    15. Cappiello, Lorenzo & Kadareja, Arjan & Manganelli, Simone, 2010. "The Impact of the Euro on Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(02), pages 473-502, April.
    16. Jesse Levin, 2001. "For whom the reductions count: A quantile regression analysis of class size and peer effects on scholastic achievement," Empirical Economics, Springer, vol. 26(1), pages 221-246.
    17. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2004. "The Cross-Section of Volatility and Expected Returns," NBER Working Papers 10852, National Bureau of Economic Research, Inc.
    18. Joao Gomes & Dmitry Livdan, 2004. "Optimal Diversification: Reconciling Theory and Evidence," Journal of Finance, American Finance Association, vol. 59(2), pages 507-535, 04.
    19. Lawrence Brown & Marcus Caylor, 2009. "Corporate governance and firm operating performance," Review of Quantitative Finance and Accounting, Springer, vol. 32(2), pages 129-144, February.
    20. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc.
    21. Fu, Fangjian, 2009. "Idiosyncratic risk and the cross-section of expected stock returns," Journal of Financial Economics, Elsevier, vol. 91(1), pages 24-37, January.
    22. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    23. 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, 09.
    24. José Manuel Campa & Simi Kedia, 1999. "Explaining the Diversification Discount," Working Papers 99-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    25. Chuang, Chia-Chang & Kuan, Chung-Ming & Lin, Hsin-Yi, 2009. "Causality in quantiles and dynamic stock return-volume relations," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1351-1360, July.
    26. Martin, John D. & Sayrak, Akin, 2003. "Corporate diversification and shareholder value: a survey of recent literature," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 37-57, January.
    27. Belén Villalonga, 2004. "Does Diversification Cause the "Diversification Discount"?," Financial Management, Financial Management Association, vol. 33(2), pages -, Summer.
    28. Joshua Angrist & Victor Chernozhukov & Iván Fernández-Val, 2006. "Quantile Regression under Misspecification, with an Application to the U.S. Wage Structure," Econometrica, Econometric Society, vol. 74(2), pages 539-563, 03.
    29. 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, 04.
    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. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, 04.
    32. Ali Ataullah & Andrew Higson & Mark Tippett, 2007. "The Distributional Properties of the Debt to Equity Ratio: Some Implications for Empirical Research," Abacus, Accounting Foundation, University of Sydney, vol. 43(2), pages 111-135.
    33. Stephen Brown & William Goetzmann & Bing Liang & Christopher Schwarz, 2006. "Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration," Yale School of Management Working Papers amz2472, Yale School of Management, revised 11 Sep 2009.
    34. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04.
    35. Xiaoquan Jiang & Bong-Soo Lee, 2006. "The Dynamic Relation Between Returns and Idiosyncratic Volatility," Financial Management, Financial Management Association International, vol. 35(2), pages 43-65, 06.
    36. 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.
    37. Buti,Marco & Deroose,Servaas & Gaspar,Vitor & Martins,João Nogueira (ed.), 2010. "The Euro," Cambridge Books, Cambridge University Press, number 9789279098420, October.
    38. Vojislav Maksimovic & Gordon Phillips, 2002. "Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence," Journal of Finance, American Finance Association, vol. 57(2), pages 721-767, 04.
    39. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    40. Michelle L. Barnes & Anthony W. Hughes, 2002. "A quantile regression analysis of the cross section of stock market returns," Working Papers 02-2, Federal Reserve Bank of Boston.
    41. Teece, David J., 1982. "Towards an economic theory of the multiproduct firm," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 39-63, March.
    42. 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, 04.
    43. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    44. David Ashton & Paul Dunmore & Mark Tippett, 2004. "Double Entry Bookkeeping and the Distributional Properties of a Firm's Financial Ratios," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 583-606.
    45. Nicholas Barberis, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," Journal of Finance, American Finance Association, vol. 56(4), pages 1247-1292, 08.
    46. Huang, Guihai & Song, Frank M., 2006. "The determinants of capital structure: Evidence from China," China Economic Review, Elsevier, vol. 17(1), pages 14-36.
    47. Xiaoquan Jiang & Bong-Soo Lee, 2006. "The Dynamic Relation Between Returns and Idiosyncratic Volatility," Financial Management, Financial Management Association, vol. 35(2), pages -, Summer.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:2157-2173. 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: (Shamier, Wendy)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.