Diversification’s Effect on Firm Value

• What are the major results?

• What’s the contribution?

1. Academic literature

2. Management

3. Investor

Question: should corporation diversify?

Pros - value enhancing:

A. operating efficiency

B. internal capital market

C. greater debt capacity

D. lower taxes: two sources

Cons – value destroying:

• cross subsidization

• over investment

• mis-alignment of incentives between central and divisional management: because of information asymmetry

• Question: will related diversification be better than unrelated diversification?

- to share skills, resources, and reputation

- economies of scope

Past empirical results including event study, accounting performance, and Tobin’s Q produced mixed results!

• This research idea comes from the accounting rule: segment data!

• Data screening and why?• What can we learn from the sample

statistics?• Why should do the industry-adjustment?• Why and how should the tables be self

explanatory?

• Why are we not satisfied with the difference in mean (median) test between two samples?

• Industry multiples and the definition of dependent variable: excess value

• The choice of an appropriate accounting item• Why is this method better than event study

or Tobin’s Q?

• Should we delete the extreme values (outliers)? P.48• The regression of excess value in table 3: why panel A

and B? What are the explanatory variables and control variables?

• Be aware of the footnote! Footnote 3 and 4 provide sensitivity (robustness) check.

• Herfindahl index?• Are these good proxies?• How to mark the significance level?• Cross sectional vs time series

• Why makes table 4?• Why table 5?• Perhaps the segments of diversified firms are less

profitable than their counterpart single-line firms? • Further investigation of cross sectional differences

in the value loss• How to measure the over investment?• How to measure the cross subsidization?• Will this value loss be mitigated by tax effect?