Manufactured Diversification Discount

Hund, John; Monk, Donald; Tice, Sheri

doi:10.2139/ssrn.2535017

Cited by 13 publications

(16 citation statements)

References 75 publications

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“…In the unmatched sample, conglomerates are ten years older on average than focused firms (the mean age of conglomerates in Compustat is 25.6 years). Thus, the existence of the conglomerate discount might be due to sample selection bias (e.g., Villalonga (2004b), Custódio (2014), and Hund et al (2016)). Matching a conglomerate to the imputed pseudo-conglomerate based on SIC industry code-matching does not take into account differences in characteristics that can dramatically affect statistical inference, such as profitability and sales.…”

Section: Propensity Score Matchingmentioning

confidence: 99%

“…Existing explanations include the ideas that (i) the diversification is sub-optimal and causes low profitability, (ii) less profitable firms optimally choose to diversify, and (iii) the entire literature is a statistical mirage generated by poor matching of conglomerate and stand-alone firms. For examples of these explanations see Jensen (1986), Rajan et al (2000), Scharfstein and Stein (2000), Maksimovic and Phillips (2002), Campa and Kedia (2002), Villalonga (2004b), Custódio (2014), and Hund et al (2016). See Maksimovic and Phillips (2013) for a comprehensive survey.…”

Section: Introductionmentioning

confidence: 99%

“…One of the main criticisms of the methodology employed by Lang and Stulz (1994) and Berger and Ofek (1995) is that matching conglomerate firms to imputed values taken from pure plays uses benchmark firms that are very different from conglomerates. For instance, Hund et al (2016) mention that, "the Berger and Ofek [1995] procedure matches diversified firms to focused firms that are 15 times smaller on average." Thus, the existence of the conglomerate discount might be due to sample selection bias (e.g., Villalonga (2004b), Custódio (2014), and Hund et al (2016)).…”

Section: Introductionmentioning

confidence: 99%

“…For instance, Hund et al (2016) mention that, "the Berger and Ofek [1995] procedure matches diversified firms to focused firms that are 15 times smaller on average." Thus, the existence of the conglomerate discount might be due to sample selection bias (e.g., Villalonga (2004b), Custódio (2014), and Hund et al (2016)). To rule out this possibility, all of our analyses are performed on a matched sample using propensityscore matching as in Villalonga (2004b) and Custódio (2014).…”

Section: Introductionmentioning

confidence: 99%

“…Maksimovic and Phillips (2013) provide an excellent survey. Measurement issues have also been used to explain (or deny) the existence of the discount (e.g., Campa and Kedia (2002), Villalonga (2004a), Villalonga (2004b, Custódio (2014) and Hund et al (2016)).…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Short-Sales Constraints and the Diversification Puzzle

2021

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Disagreement about stock valuation, combined with short-sales constraints, can increase asset prices. We build a model showing that, so long as investor beliefs are not perfectly correlated, investors disagree less about the value of a conglomerate than about each of its individual divisions. This generates a conglomerate discount with disagreement and short-sales constraints being complementary in explaining its cross-sectional variation. We test these predictions empirically and find substantial support: conglomerates have lower differences of opinion and lower short-sales constraints than pure-play firms. Furthermore, greater differences of opinion and tighter short-sales constraints are significant predictors of valuation differences between conglomerates and pure plays. This paper was accepted by Karl Diether, finance.

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Section: Propensity Score Matchingmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Short-Sales Constraints and the Diversification Puzzle

2021

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Diversification discount and investor sentiment

Harper

Iyer

Nejadmalayeri

2017

The North American Journal of Economics and Finance

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Agency motives and the corporate diversification decision: perspectives of corporate executives in Nigeria

Ibekwe

2023

QRFM

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Purpose The purpose of this study was to explore the motives (especially the agency motives) for corporate diversification from the perspective of corporate executives who make such strategic decisions and manage the diversified firms daily. Design/methodology/approach A qualitative research approach was adopted, and 12 chief executive officers (CEOs) of diversified firms in Nigeria were interviewed for their perspectives on the motives for corporate diversification. Findings Stewardship motives – diversification to use excess capacities in assets and resources to exploit opportunities in the market and defend against adverse environmental developments – were the most cited reasons for diversification. The relevant agency problem related to corporate diversification motive in Nigeria is the principal–principal (majority shareholder-minority shareholder) one. CEOs with substantial holdings in their firms indicated that they use diversification to reduce their investment risk and retain control of their portfolio. Practical implications The findings suggest that in corporate environments such as Nigeria that feature blockholding prominently, the corporate strategy-related agency problem that policymakers should pay greater attention to is the principal–principal conflict rather than the traditional agent–principal problem that has influenced corporate governance over the years. There is also a need to revise the dominant view that diversification is a value-destroying strategy motivated by the self-seeking behavior of managers who have little or no shares in the companies they manage. Originality/value The few studies on motives for corporate diversification that incorporated the perspectives of corporate executives did not address the agency motives of diversification. To the best of the authors’ knowledge, this is the first study that has done so.

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Manufactured Diversification Discount

Cited by 13 publications

References 75 publications

Short-Sales Constraints and the Diversification Puzzle

Short-Sales Constraints and the Diversification Puzzle

Diversification discount and investor sentiment

Agency motives and the corporate diversification decision: perspectives of corporate executives in Nigeria

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