Can growth opportunities explain the diversification discount?

Stowe, John D.; Xing, Xuejing

doi:10.1016/j.jcorpfin.2005.05.001

Cited by 46 publications

(70 citation statements)

References 25 publications

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“…Santalo and Becerra (2004) explain conceptually and provide empirical evidence that no relationship exists (positive, negative or even quadratic) between diversification and firm performance. Santalo and Becerra (2008), concurring with Stowe and Xing (2006), broadly conclude, (a) the empirical evidence is inconclusive (b) models perspectives and results differ based on the disciplinary perspective chosen by the researcher and (c) the relationship between diversification and performance is complex and is affected by intervening and contingent variables such as related versus unrelated diversification, and mode of diversification.…”

Section: The Diversification-performance Relationshipmentioning

confidence: 84%

“…Finally, recent works (Stowe & Xing, 2006;Emms & Kale, 2006;Kuppuswamy & Villalonga, 2010) have attempted to overcome such a discount/premium dichotomy and have come up with existence of moderating variables in the diversification-value relationship which can make some diversifiers create more value than others. Does diversification create value for firms?…”

Section: Corporate Diversification Creates Shareholder Valuementioning

confidence: 99%

“…As a consequence the debate has recently centered on seeking conditions under which diversification can result in a value-creating strategy (Mackey, 2012). In this vein, different moderating variables have been suggested, such as relatedness between segments, industry, period of analysis, geographical versus industrial diversification, diversity of growth opportunities or the diversification profile (Santalo & Becerra, 2008;Andreou & Louca, 2010;Stowe & Xing, 2006).…”

Section: Corporate Diversification Creates Shareholder Valuementioning

confidence: 99%

“…To Stowe and Xing (2006) argued that the use of different accounting measures of performance has led to ambiguous results since these are subject to manipulation prompting the authors to also adopt market measures as alternative proxy. Even though both measures may have limited capability to measure performance (accounting and market measures) at least using them together could capture almost all performance goals.…”

Section: Net Income After Taxes But Before Extra Ordinary Items Totalmentioning

confidence: 99%

“…5;2014 Since accounting conventions make these variables unreliable, financial economists prefer market returns or discounted cash flows as performance measures. For consistency purposes Stowe and Xing (2006) used two accounting measures, ROE and ROA along with market return to measure performance. Daud et al (2009) employed accounting measure of performance by using return on asset (ROA) as a proxy.…”

Section: Wwwccsenetorg/ijefmentioning

confidence: 99%

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Diversification as a Corporate Strategy and Its Effect on Firm Performance: A Study of Zimbabwean Listed Conglomerates in the Food and Beverages Sector

Mashiri¹,

Favourate²

2014

IJEF

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Portfolio diversification in capital markets is an accepted investment strategy. On the other hand corporate diversification has drawn many opponents especially the agency theorists who argue that executives must not diversify on behalf of share holders. Diversification is a strategic option used by many managers to improve their firm's performance. While extensive literature investigates the diversification performance linkage, little agreements exist concerning the nature of this relationship. Both theoretical and empirical disagreements abound as the extensive research has neither reached a consensus nor any interpretable and acceptable findings. This paper looked at diversification as a corporate strategy and its effect on firm performance using Conglomerates in the Food and Beverages Sector listed on the ZSE. The study used a combination of primary and secondary data. Primary data was collected through interviews while secondary data were gathered from financial statements and management accounts. Data was analyzed using SPSS computer package. Three competing models were derived from literature (the linear model, Inverted U model and Intermediate model) and these were empirically assessed and tested.

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Section: The Diversification-performance Relationshipmentioning

confidence: 84%

Section: Corporate Diversification Creates Shareholder Valuementioning

confidence: 99%

Section: Corporate Diversification Creates Shareholder Valuementioning

confidence: 99%

Section: Net Income After Taxes But Before Extra Ordinary Items Totalmentioning

confidence: 99%

Section: Wwwccsenetorg/ijefmentioning

confidence: 99%

See 3 more Smart Citations

Diversification as a Corporate Strategy and Its Effect on Firm Performance: A Study of Zimbabwean Listed Conglomerates in the Food and Beverages Sector

Mashiri¹,

Favourate²

2014

IJEF

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Behind the curtain of international diversification: An agency theory perspective

Dagnino

Giachetti

Rocca

et al. 2018

Global Strategy Journal

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Research Summary: This article dissects the antecedents of international diversification through the lens of the agency cost of free cash flow arguments. It explores whether the partial convergence of interests among managers, majority shareholders, and minority shareholders affects a firm's choice to diversify internationally. Using a sample panel of 60 Italian firms evaluated longitudinally from 2004 to 2014, the study tests whether a firm's international diversification is affected by its free cash flow (as the ultimate source of managerial discretion) and debt (as the main constraint to managerial discretion), especially in firm contexts that exacerbate agency problems. We find that the effects on international diversification of free cash flow and debt are contingent on ownership concentration, family control, and growth opportunities. Managerial Summary: This article studies the antecedents of international diversification by considering the conflicts of interest among managers, majority shareholders, and minority shareholders. First, it shows that the available cash flow (as the fundamental wellspring of managerial discretion) and level of indebtedness (as a key limitation to managerial discretion) have, respectively, a positive and a negative effect on firms' international diversification. Second, it shows that the effects of cash flow and debt are particularly relevant when considering three factors: (a) the concentration of firm ownership, leading to conflicts of interest between majority and minority shareholders; (b) family control, leading to conflicts of interest between family members and other shareholders; and (c) the potential to exploit growth opportunities, leading to conflicts of interest between managers and shareholders.

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The value of flexibility in multi‐business firms

Dickler

Folta

Santaló

et al. 2022

Strategic Management Journal

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Research Summary Whether diversified firms have advantages over their single‐business counterparts is the focus of much research in strategic management. Indeed, there is sparse evidence that corporate advantage exists, on average. We explore one potential driver of corporate advantage—that multi‐business firms have more flexibility than single‐business firms to cope with uncertainty, because they can internally redeploy resources across businesses. Using Compustat data, we show that uncertainty increases the relative advantage of multi‐business firms, a finding robust to controls for endogeneity. Consequently, the paper provides important insight and evidence around when corporate advantage might obtain. Moreover, we find that growth option value is accentuated in the presence of switching flexibility. Finally, multi‐business firms with redeployment experience and businesses with more inversely correlated returns benefit more from uncertainty. Managerial Summary Multi‐business firms have a flexibility advantage over single‐business firms as they can reallocate firm resources from one business unit to another depending on inducements. What is the impact of this flexibility on firm value? In this paper, we test whether such a flexibility advantage translates into greater economic returns in more volatile markets. We expect that resource redeployment creates value if it amplifies business‐specific positive shocks while alleviating business‐specific downturns. Consistent with this argument, we find empirical evidence that with increasing stock market volatility, multi‐business firms benefit significantly more in terms of firm value than their single‐business counterparts. In particular, in highly volatile stock markets, monthly adjusted returns are 2.3 times higher for multi‐business firms than for single‐business firms.

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Can growth opportunities explain the diversification discount?

Cited by 46 publications

References 25 publications

Diversification as a Corporate Strategy and Its Effect on Firm Performance: A Study of Zimbabwean Listed Conglomerates in the Food and Beverages Sector

Diversification as a Corporate Strategy and Its Effect on Firm Performance: A Study of Zimbabwean Listed Conglomerates in the Food and Beverages Sector

Behind the curtain of international diversification: An agency theory perspective

The value of flexibility in multi‐business firms

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