A Pure Financial Rationale for the Conglomerate Merger

Lewellen, Wilbur G.

doi:10.1111/j.1540-6261.1971.tb00912.x

Cited by 895 publications

(447 citation statements)

References 19 publications

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“…Second, diversification may benefit firms by a coinsurance effect derived from combining businesses with imperfectly correlated earnings. This effect reduces firms' unsystematic risk and thus increases value (Bhide, 1990;Lewellen, 1971;Shleifer and Vishny, 1992). Third, diversification creates a tax advantage by allowing the losses of some segments to be offset by the profits of others (Majd and Myers, 1987).…”

Section: Literature Reviewmentioning

confidence: 99%

Corporate diversification and firm value: evidence from emerging markets

Akben-Selçuk

2015

International Journal of Emerging Markets

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Purpose – The purpose of this paper is to investigate the impact of corporate diversification on firm value in a sample of nine emerging markets including Brazil, Chile, Indonesia, Malaysia, Philippines, Poland, South Africa, Thailand, and Turkey. For the purpose of this study, a company is classified as diversified when it is operating in two or more lines of business defined by the two-digit SIC codes. Design/methodology/approach – Employing panel data from 1,568 companies for the period 2005-2010, this paper estimates both a fixed effects model and a dynamic generalized method of moments model. Data are collected both at company level and segment level within each firm. Findings – Overall, analysis results suggest that, for the period from 2005 to 2010, diversified firms in emerging markets are valued more compared to single-segment firms operating in similar industries, providing support for diversification premium. Originality/value – The effect of diversification on company value in emerging markets is an important managerial and public policy concern. Although the literature on developed country diversified firms is rich, only a few studies have examined diversification-value relationship in the context of developing countries. Furthermore, most previous research on the value effects of corporate diversification in emerging markets has taken the form of case studies within countries and concentrated on the 1990s. This paper tries to fill these gaps by using a larger sample and more recent data and methodology.

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Section: Literature Reviewmentioning

confidence: 99%

Corporate diversification and firm value: evidence from emerging markets

Akben-Selçuk

2015

International Journal of Emerging Markets

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“…Moreover, these conglomerates can serve as department stores, offering an array of financial products including investment, savings, credit and insurance products, to their customers. Thus, corporate combinations help enhance competitive sales through the appeal of a more complete product line (Lewellen, 1971). These one-stop shopping centres provide considerable convenience for the clients and reduce the latter's search, information, monitoring and transaction costs, compared to shopping from specialty firms (DeYoung and Rice, 2004b).…”

Section: Hypothesesmentioning

confidence: 98%

Do insurance activities enhance the performance of financial services holding companies?

Chang

Elyasiani

2015

Applied Economics

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Stiroh and Rumble (2006) and Yeager et al. (2007) have argued that extension of banks into nonbanking activities produces no diversification benefits for financial services holding companies (FSHCs) eligible to consolidate banking and insurance products. We investigate the effect of aggregate nonbank activities, as well as two main areas of insurance business, namely agency and underwriting enterprise, on the risk-adjusted performance of FSHCs. Our sample includes a quarterly panel data of FSHCs over the period 2003-2011. We find that the effect of FSHCs' entry into agency insurance activities on their risk-adjusted returns is dependent on their size; it is positive for FSHCs in the top quartile of our sample (assets greater than $4.495 billions), but negative for smaller and mid-size FSHCs. The effect of underwriting insurance activities on risk-adjusted returns is generally negative or statistically insignificant, except for some of the largest-size firms.

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“…Second, diversification can mitigate the underinvestment problem through an efficient allocation of assets by creating an internal capital market (Weston, 1970;Stulz, 1990). Third, diversification can help lower capital costs and increase capital raising capacity since earnings streams from diversified divisions have low correlations to make corporate cash flows stabilized (Lewellen, 1971). Fourth, related diversification is advantageous in building up economies of scale and utilizing strategic assets (Markides and Williamson, 1994).…”

Section: The Effect Of Diversification On Firm Valuementioning

confidence: 99%

“…On the other hand, Lewellen (1971) argues that if diversification is carried out within similar industries, the insurance effect from unrelated diversification would be so insignificant that an increase in firm value by way of debt capacity augmentation will not take shape. Amihud and Lev (1981) also show that unrelated diversification is associated with lower firm risk due to the existence of multiple lines of business with imperfectly correlated returns.…”

Section: The Effect Of Related and Unrelated Divesification On Firm Vmentioning

confidence: 99%

“…As Chatterjee and Wernerfelt (1991) note, optimal diversification would be different according to firm resources, suggesting that the diversification type is directly linked to firm value. Related diversification may offer both positive and negative valuation effects relative to unrelated diversification, and existing literature offers mixed evidence on this issue (see Lewellen, 1971;Rumelt, 1974;Amihud and Lev, 1981;Nayyar, 1993;Markides and Williamson, 1994;Claessens et al, 2003;Doukas and Kan, 2004).…”

Section: Introductionmentioning

confidence: 99%

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Corporate Diversification, Relatedness, and Firm Value: Evidence from Korean Firms*

Bae

Kwon

Lee

2008

Asia-Pacific Journal of Financial Studies

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We examine the valuation effects of diversification activities for Korean firms by diversification type and the occasion of the Korean financial crisis. Employing a unique dataset of 2,894 firm-years for the entire manufacturing industries, we find that diversification by Korean firms on average decreases firm value but its effect varies by the type of diversification. While unrelated diversification erodes firm value, related diversification is associated with a non-negative effect on firm value. These valuation effects are more pronounced before the crisis than after the crisis. Our results also show an important role of a firm's affiliation to a large business group, known as chaebols, that related diversification by chaebol-affiliated firms comes with a significant value gain. We further find that the different valuation effects of unrelated and related diversification are closely related to a firm's ownership concentration and financial leverage. Our results are robust to different samples and regression model specifications.

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A Pure Financial Rationale for the Conglomerate Merger

Cited by 895 publications

References 19 publications

Corporate diversification and firm value: evidence from emerging markets

Corporate diversification and firm value: evidence from emerging markets

Do insurance activities enhance the performance of financial services holding companies?

Corporate Diversification, Relatedness, and Firm Value: Evidence from Korean Firms*

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