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Diversification: Value-Creating or Value-Destroying Strategy? Evidence from Using Panel Data

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Abstract

This paper provides evidence on how the diversification strategy impact on the firm value. Furthermore the paper studies the effect of the levels and types of diversification on the firm value. To achieve this aim, we propose a value model that incorporates the level and type of diversification. The estimation of the model by using the Generalized Method of Moments provides interesting results. Consistent with the value-destroying expectations, we find a reduction in the value of the diversified companies in the eurozone countries, however there is a non linear relationship between the diversification and value, giving rise to an optimal level of diversification. Moreover our results support that related diversification is more value-creating than non-related diversification. Additionally we test the effect of diversification of market valuation by focusing on the discount that diversified firms trade at, then a value destroying is achieved for the diversified companies in our sample, and we also have evidence on the hypothesis that relatedness moderates the value loss from diversification.

Suggested Citation

  • Antonio Galv n & Pindado, Julio & Torre, Chabela de la, 2007. "Diversification: Value-Creating or Value-Destroying Strategy? Evidence from Using Panel Data," Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". 2007-04, Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Docto.
  • Handle: RePEc:ntd:wpaper:2007-04
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    Keywords

    Corporate diversification; relatedness; firm value; excess value;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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