IDEAS home Printed from https://ideas.repec.org/p/cen/wpaper/01-13.html
   My bibliography  Save this paper

Diversification Discount or Premium? New Evidence from BITS Establishment-Level Data

Author

Listed:
  • Belen Villalonga

Abstract

This paper examines whether the finding of a diversification discount in U.S. stock markets is only a data artifact. Segment data may give rise to biased estimates of the value effect of diversification because segments are defined inconsistently across firms, and that inconsistency does not occur at random. I use a new establishment-level database that covers the whole U.S. economy (BITS) to construct business units that are more consistently and objectively defined across firms, and thus more comparable. Using a common methodological approach on a sample of firms which exhibit a diversification discount according to segment data, I find that, when BITS data are used, diversified firms actually trade at a significant average premium. The premium is robust to variations in the method, sample, business unit definition, and measures of excess value and diversification used.

Suggested Citation

  • Belen Villalonga, 2001. "Diversification Discount or Premium? New Evidence from BITS Establishment-Level Data," Working Papers 01-13, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:01-13
    as

    Download full text from publisher

    File URL: https://www2.census.gov/ces/wp/2001/CES-WP-01-13.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Berger, Philip G & Ofek, Eli, 1996. "Bustup Takeovers of Value-Destroying Diversified Firms," Journal of Finance, American Finance Association, vol. 51(4), pages 1175-1200, September.
    2. Schipper, Katherine & Thompson, Rex, 1983. "Evidence on the capitalized value of merger activity for acquiring firms," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 85-119, April.
    3. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. "Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
    4. Jacquemin, Alexis P & Berry, Charles H, 1979. "Entropy Measure of Diversification and Corporate Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 359-369, June.
    5. Lamont, Owen, 1997. "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
    6. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    7. Lichtenberg, Frank R, 1991. "The Managerial Response to Regulation of Financial Reporting for Segments of a Business Enterprise," Journal of Regulatory Economics, Springer, vol. 3(3), pages 241-249, September.
    8. Lichtenberg, Frank R., 1992. "Industrial de-diversification and its consequences for productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 427-438, August.
    9. Kee H. Chung & Stephen W. Pruitt, 1994. "A Simple Approximation of Tobin's q," Financial Management, Financial Management Association, vol. 23(3), Fall.
    10. 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.
    11. 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.
    12. Lemelin, Andre, 1982. "Relatedness in the Patterns of Interindustry Diversification," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 646-657, November.
    13. Hayes, RM & Lundholm, R, 1996. "Segment reporting to the capital market in the presence of a competitor," Journal of Accounting Research, Wiley Blackwell, vol. 34(2), pages 261-279.
    14. Antoinette Schoar, 2002. "Effects of Corporate Diversification on Productivity," Journal of Finance, American Finance Association, vol. 57(6), pages 2379-2403, December.
    15. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    16. Fernando Merino & Diego R. Rodríguez, 1997. "A consistent analysis of diversification decisions with non‐observable firm effects," Strategic Management Journal, Wiley Blackwell, vol. 18(9), pages 733-743, October.
    17. Montgomery, Cynthia A. & Hariharan, S., 1991. "Diversified expansion by large established firms," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 71-89, January.
    18. 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.
    19. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    20. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
    21. Gordon M Phillips & Vojislav Maksimovic, 1999. "Do Conglomerate Firms Allocate Resources Inefficiently?," Working Papers 99-11, Center for Economic Studies, U.S. Census Bureau.
    22. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
    23. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    24. John G. Matsusaka, 1993. "Takeover Motives during the Conglomerate Merger Wave," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 357-379, Autumn.
    25. Toni M. Whited, 2001. "Is It Inefficient Investment that Causes the Diversification Discount?," Journal of Finance, American Finance Association, vol. 56(5), pages 1667-1691, October.
    26. G.A. Feltham & J.Z. Xie, 1992. "Voluntary financial disclosure in an entry game with continua of types," Contemporary Accounting Research, John Wiley & Sons, vol. 9(1), pages 46-80, September.
    27. Harris, MS, 1998. "The association between competition and managers' business segment reporting decisions," Journal of Accounting Research, Wiley Blackwell, vol. 36(1), pages 111-128.
    28. 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.
    29. David S. Scharfstein, 1998. "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates," NBER Working Papers 6352, National Bureau of Economic Research, Inc.
    30. Zoltan J Acs & Catherine Armington, 1998. "Longitudinal Establishment And Enterprise Microdata (LEEM) Documentation," Working Papers 98-9, Center for Economic Studies, U.S. Census Bureau.
    31. Brian S. Silverman, 1999. "Technological Resources and the Direction of Corporate Diversification: Toward an Integration of the Resource-Based View and Transaction Cost Economics," Management Science, INFORMS, vol. 45(8), pages 1109-1124, August.
    Full references (including those not matched with items on IDEAS)

    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. Villalonga, Belen, 2000. "Does Diversification Cause the “Diversification Discount”?," University of California at Los Angeles, Anderson Graduate School of Management qt40v212gm, Anderson Graduate School of Management, UCLA.
    2. 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.
    3. 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.
    4. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    5. 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.
    6. Campa, Jose M. & Chang, P. H. Kevin & Refalo, James F., 2002. "An options-based analysis of emerging market exchange rate expectations: Brazil's Real Plan, 1994-1999," Journal of Development Economics, Elsevier, vol. 69(1), pages 227-253, October.
    7. Gomes, Joao & Livdan, Dmitry, 2002. "Optimal Diversification," CEPR Discussion Papers 3461, C.E.P.R. Discussion Papers.
    8. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    9. Doukas, John A. & Kan, Ozgur B., 2008. "Investment decisions and internal capital markets: Evidence from acquisitions," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1484-1498, August.
    10. Matsusaka, John G. & Nanda, Vikram, 2002. "Internal Capital Markets and Corporate Refocusing," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 176-211, April.
    11. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
    12. Gomes, Joao & Livdan, Dmitry, 2002. "The Performance of Optimally Diversified Firms: Reconciling Theory and Evidence," CEPR Discussion Papers 3546, C.E.P.R. Discussion Papers.
    13. Dey, Tania & Banerjee, Rajabrata, 2011. "Can Corporate Diversification Promote Firm Value? A Survey," MPRA Paper 28928, University Library of Munich, Germany.
    14. Klein, Peter G, 2001. "Were the Acquisitive Conglomerates Inefficient?," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 745-761, Winter.
    15. David J. Denis & Diane K. Denis & Keven Yost, 2002. "Global Diversification, Industrial Diversification, and Firm Value," Journal of Finance, American Finance Association, vol. 57(5), pages 1951-1979, October.
    16. Lamont, Owen A. & Polk, Christopher, 2002. "Does diversification destroy value? Evidence from the industry shocks," Journal of Financial Economics, Elsevier, vol. 63(1), pages 51-77, January.
    17. Felipe Balmaceda, 2009. "Mergers and CEO Power," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(3), pages 454-486, September.
    18. Lin, Chen & Su, Dongwei, 2008. "Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 405-417, September.
    19. Nilakshi Borah & Liu Pan & Jung Chul Park & Nan Shao, 2018. "Does corporate diversification reduce value in high technology firms?," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 683-718, October.
    20. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo 141, Centro de Economía Aplicada, Universidad de Chile.

    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:cen:wpaper:01-13. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dawn Anderson (email available below). General contact details of provider: https://edirc.repec.org/data/cesgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.