Does Diversification Cause the 'Diversification Discount'?

Villalonga, Belén

doi:10.2139/ssrn.227828

Cited by 437 publications

(586 citation statements)

References 64 publications

(79 reference statements)

Supporting

Mentioning

490

Contrasting

Unclassified

Order By: Relevance

“…Their results indicate that the diversification discount declines substantially and sometimes turns into a premium when the endogeneity of the diversification decision is accounted for. Based on similar econometric techniques, Villalonga (2004) likewise shows that the failure to control for firm characteristics that lead firms to diversify and be discounted may wrongly attribute the discount to diversification instead of the underlying characteristics.…”

Section: Literature Reviewmentioning

confidence: 99%

“…We use Heckman's (1979) two-step procedure to control for the endogeneity of the diversification decision (e.g., see Campa and Kedia, 2002;Villalonga, 2004). In the first-step, we estimate a probit regression with a dummy variable whether the firm is di-versified as the dependent variable.…”

Section: Multivariate Regression Analysismentioning

confidence: 99%

“…The results in Panel B of Table 6 (Column 4) reveal that the coefficient on the diversification dummy variable remains negative and significant while the self-selection parameter is positive and insignificant. Alternatively, we repeat the analysis by modelling the decision to diversify rather than being diversified as the firms' endogenous choice (e.g., see Villalonga, 2004). Specifically, in the first stage we estimate a probit regression with a dummy variable whether the firm diversified (i.e., increases the number of segments) as the dependent variable.…”

Section: Multivariate Regression Analysismentioning

confidence: 99%

See 2 more Smart Citations

Do financial conglomerates create or destroy economic value?

Schmid

Walter

2009

Journal of Financial Intermediation

209

View full text Add to dashboard Cite

This paper attempts to ascertain whether or not functional diversification is valueenhancing or value-destroying in the financial services sector. Based on a U.S. dataset comprising approximately 4060 observations covering the period 1985-2004, we report a substantial and persistent conglomerate discount among financial intermediaries. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. We also investigate the geographic dimension of diversification as well as the interaction between geographic scope and functional diversification and find that the value-destruction associated with functional diversification is not apparent in geographic diversification. A further finding is that there is a significant premium for the very largest of our sample firms (with total assets above 100bn USD) indicating that there are "too big to fail" guarantees for very large financial conglomerates.

show abstract

Section: Literature Reviewmentioning

confidence: 99%

Section: Multivariate Regression Analysismentioning

confidence: 99%

Section: Multivariate Regression Analysismentioning

confidence: 99%

See 1 more Smart Citation

Do financial conglomerates create or destroy economic value?

Schmid

Walter

2009

Journal of Financial Intermediation

209

View full text Add to dashboard Cite

show abstract

“…While a number of firms are active in multiple businesses, most of them tend to be diversified along related businesses (Villalonga, 2000). Past research has used the SIC system's 4-digit classification to categorize firms into industries.…”

Section: This Paper Uses the Data Sets Of Three Big Open Economies (Umentioning

confidence: 99%

The home country in the age of globalization: how much does it matter for firm performance?

Hawawini

Subramanian

Verdin

2004

Journal of World Business

View full text Add to dashboard Cite

The globalization process has created considerable speculation on the impact of the home country environment to a firm's competitive advantage in international markets. Using a random effects model that is partly induced from the concept of comparative advantage and partly following the descriptive modeling of performance determinants, this paper explores the quantitative impact of home country environment on the performance for firms across 6 countries. The paper uses two value based, i.e. risk adjusted and cash-flow based, measures of firm performance. The results indicate that the importance of country factors is low and firm-specific factors dominate performance across and within countries. The results also show that global industry effects are increasingly more important than country effects.

show abstract

“…In our q regression estimations (to be discussed below), we also include a set of control variables that are commonly used when q is specified as a dependent variable to measure firm value (see, e.g., Lang and Stulz (1994), Ofek (1995, 1996), Rajan, Servaes, and Zingales (2000), Lamont and Polk (2002), Villalonga (2004)). In particular, our set of control variables includes Size, the book value of total assets; Profitability, the ratio of earnings before interest, taxes, depreciation, and amortization (SNL item #132773) to the book value of total assets; and Earnings Volatility, the ratio of the standard deviation of earnings before interest, taxes, depreciation and amortization using three years of consecutive quarterly observations to the average book value of total assets estimated over the same time horizon.…”

Section: Table I Herementioning

confidence: 99%