Uncertainty about average profitability and the diversification discount

Hund, John; Monk, Donald; Tice, Sheri

doi:10.1016/j.jfineco.2010.02.006

Cited by 69 publications

(46 citation statements)

References 35 publications

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“…Consistent with Hund et al (2010), we find higher operating cash flows of 8% for diversified firms relative to 5.1% for specialized firms. These preliminary results are consistent with hypothesis 2a that FCF in diversified firms is greater than or equal to FCF in specialized firms and support the precautionary saving hypothesis.…”

Section: Insert Table 4 Heresupporting

confidence: 82%

“…The literature provides neither strong theoretical arguments nor clear empirical evidence that diversified firms generate less operating cash flow than specialized firms (Melicher and Rush, 1973;Weston and Mansinghka, 1971). Hund et al, (2010) find that diversified firms actually have higher profitability than specialized firms.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 96%

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How firms manage their cash flows: an examination of diversification’s effect

Nguyen

Cai

McColgan

2016

Rev Quant Finan Acc

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We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.JEL classification: D92; G32.

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Section: Insert Table 4 Heresupporting

confidence: 82%

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 96%

How firms manage their cash flows: an examination of diversification’s effect

Nguyen

Cai

McColgan

2016

Rev Quant Finan Acc

View full text Add to dashboard Cite

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“…Their results contradict earlier findings by Laeven and Levine (2007) who find no evidence of a diversification premium. Hund et al (2010) shed some light on the debate in their study of the uncertainty about how average profitability of the bank biases the impact of diversification on bank value-an endogeneity problem that exists in cross-…”

Section: Appendixmentioning

confidence: 99%

Can Banks in Emerging Economies Benefit from Revenue Diversification?

2010

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This paper investigates the effect of revenue diversification on bank performance and risk. Using a panel dataset of 226 listed banks across 11 emerging economies and a new methodological approach, System Generalized Method of Moments estimators (System GMM), the results in this paper provide empirical evidence of the impact of the observed shift towards non-interest income generating activities on insolvency risk and bank performance. The core finding is that diversification across and within both interest and non-interest income generating activities decrease insolvency risk and enhance profitability. The results also show that these benefits are largest for banks with moderate risk exposures. By extension, these results have significant strategic implications for bank managers, regulators and supervisors who share a common interest in boosting bank performance and stability. We thank Robert Sauer, John Micklewright, Klaus Schaeck, Mohammed Amidu, Alistair Milne and an anonymous referee for helpful comments.

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“…The finding that information contained in segment‐level data can help to improve a firm's profitability forecasts underlines the usefulness of less aggregated accounting disclosure. Yet, following the introduction of SFAS 131, the segment data is less comparable across firms (Hund et al, ). We find evidence consistent with deteriorated segment data quality being a factor contributing to the lack of industry effects in forecasting segment profitability after SFAS 131.…”

Section: Resultsmentioning

confidence: 99%

Industry Effects in Firm and Segment Profitability Forecasting

Schröder

Yim

2018

Contemporary Accting Res

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Academics and practitioners have long recognized the importance of a firm's industry membership in explaining its financial performance. Yet, contrary to conventional wisdom, recent research shows that industry‐specific profitability forecasting models are not better than economy‐wide models. The objective of this paper is to further explore this result and to provide insights into when and why industry‐specific profitability forecasting models are useful. We show that industry‐specific forecasts are significantly more accurate in predicting profitability for single‐segment firms and, to some extent, for business segments. For multiple‐segment firms, the aggregation of segment‐level data for external reporting of firm‐level financials obliterates the industry effects of their segments.

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Uncertainty about average profitability and the diversification discount

Cited by 69 publications

References 35 publications

How firms manage their cash flows: an examination of diversification’s effect

How firms manage their cash flows: an examination of diversification’s effect

Can Banks in Emerging Economies Benefit from Revenue Diversification?

Industry Effects in Firm and Segment Profitability Forecasting

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