diversification discount

cash flows vs. returns
  • 45 Pages
  • 3.24 MB
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by
National Bureau of Economic Research , Cambridge, MA
Diversification in industry -- United States -- Econometric models., Corporations -- Valuation -- United States -- Econometric models., Cash flow -- United States -- Econometric models., Rate of return -- United States -- Econometric mo
Other titlesCash flows vs. returns
StatementOwen A. Lamont, Christopher Polk.
SeriesNBER working paper series -- working paper 7396, Working paper series (National Bureau of Economic Research) -- working paper no. 7396.
ContributionsPolk, Christopher., National Bureau of Economic Research.
Classifications
LC ClassificationsHB1 .W654 no. 7396
The Physical Object
Pagination45 p. ;
ID Numbers
Open LibraryOL22393016M

Search has indicated the existence of a “diversification discount” that conglomerates are valued at a discount as compared to a portfolio of single segment firms. 1) Two broad views have emerged to explain the “diversification discount” phenome-Cited by: 5. The Diversification Discount and Inefficient Investment.

Share. The book value of assets and the ratio of market value to the cost of asset replacement value are used to track the relative value added by headquarters' allocation of funds to each segment within each firm.

When they attempt to explain the value added through allocation using. We analyze whether the diversification discount is driven by the book value diversification discount book of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm by: Diversification discount can be defined as the difference between the market values of a diversified firm and a comparable portfolio of single segment firms operating in similar lines of businesses as the divisions of the diversified firm.

We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the diversification discount book value of debt for.

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We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk.

The diversification discount drops, and sometimes disappears, when we control for the endogeneity of the diversification decision. The evidence in all three methods indicates that the discount on multiple segment years is partly due to endogeneity. The coefficient of the.

The diversification discount has been the subject of an active debate in corporate finance during the past few years.' At the heart of the debate is the question of whether diversification destroys value. Many studies have replicated Lang and Stulz () and Berger and Ofek's () finding that.

Consistent with this risk reduction hypothesis, we find that (i) shareholder losses in diversification are a function of firm leverage, (ii) all equity firms do not exhibit a diversification discount, and (iii) using book values of debt to compute excess value creates a. Abstract.

We diversification discount book whether the diversification discount is driven by the book value bias of corporate debt.

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Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk.

Downloadable. Diversified firms trade at a discount relative to similar single-segment firms. We argue in this paper that this observed discount is not per se evidence that diversification destroys value. Firms choose to diversify. Firm characteristics, which make firms diversify might also cause them to be discounted.

Not taking into account these firm characteristics might wrongly attribute. What I Teach My Students about the Diversification Discount: A Brief Summary by Professor Laurie Simon Hodrick, Columbia Business School Students in my Advanced Corporate Finance course address the diversification discount during the segment on mergers and corporate control.

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation - Kindle edition by Page, Sebastien. Download it once and read it on your Kindle device, PC, phones or tablets. Use features like bookmarks, note taking and highlighting while reading Beyond Diversification: What Every Investor Needs to Know About Asset s: We analyze whether the diversification discount is driven by the book value bias of corporate debt.

Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk. Thus, measures of firm value based on book values of debt undervalue diversified firms relative to focused firms.

values rely upon their book values of debt as an input to the calculation, but diversified firms’ debt may trade at a premium to book value as a result of the risk-reducing effects of diversification.2 Campa and Kedia () and Villalonga (a) argue that the diversification discount may be endogenous, as it represents the outcome of inferior.

Glaser, Markus TZ Is the diversification discount caused by the book value bias of debt. TZ Publ. in: Journal of Banking & Finance 34 (), 10, pp. We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for.

The Diversification Discount Table I Value Ratios and Leverage Ratios for Diversified Firms, to Lower case letters indicate natural logarithm. Q is the market-book ratio.

M is the market-sales ratio. D is the debt ratio, defined as the book value of the debt divided by the book value of the debt plus the market value of the equity.

q ‐based measures of the diversification discount are biased upward by mergers and acquisitions and its accounting implications. Under purchase accounting, acquired assets are reported at their transaction value, which typically exceeds the target's pre‐merger book value. This is one of a series of pieces written as a quick introduction to a controversial area which many of us have to touch upon in our courses: the diversification discount.

Diversified firms trade at a discount relative to similar single-segment firms. We argue in this paper that this observed discount is not per se evidence that diversification destroys value.

Firms choose to diversify. Firm characteristics, which make firms diversify might also cause them to be discounted. Not taking into account these firm characteristics might wrongly attribute the observed.

The allegedly beneficial or detrimental effects of diversification on the value of the firm have remained in the core of the business research for long time ().Recent literature on corporate governance and finance has underlined the effect of corporate ownership, showing that the corporate diversification discount is more pronounced among firms with low managerial ownership and controlled by.

years, and using the ratio of firm market value to book value. The diversification discount estimate is always positive in these additional regressions, but sometimes it is not significant.4 Although our evidence shows that there is a diversification dis- count, this discount can be attributed fully to diversification only if.

The Diversification Discount: Fundamentals or Accounting Rules. By Maureen McNichols, Moritz Hiemann, Stefan J. Reichelstein August Working Paper No.

"This paper investigates whether the diversity of activities conducted by financial institutionsinfluences their market valuations. We find that there is a diversification discount: The marketvalues financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financialintermediaries.

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To mitigate this measurement bias, I subtract goodwill from the book value of assets. This correction eliminates a substantial part (but not all) of the diversification discount estimated with q-based methods. Market-to-sales measures of the diversification discount should not be affected by these mergers and acquisitions effects.

and the Diversification Discount CLÁUDIA CUSTÓDIO* ABSTRACT q-based measures of the diversification discount are biased upward by mergers and acquisitions and its accounting implications.

Under purchase accounting, acquired assets are reported at their transaction value, which typically exceeds the target's pre-merger book value. Genre/Form: Electronic books: Additional Physical Format: Print version: Beckmann, Philip.

Diversification Discount am deutschen Kapitalmarkt. Wiesbaden: Springer. In addition to Beyond Diversification, he is the coauthor of the book Factor Investing and Asset Allocation, published by the CFA Institute Research Foundation® in Sébastien is a member of the editorial board of the Financial Analysts s: book assets as the diversified firm.

Thus the price and dividends on the single-segment portfolio have been multiplied by ~for example. the ratio of the diversified firm’s current sales to single-segment portfolio current sales.

A negative excess value is a diversification discount and a positive excess value is a diversification premium. Book value bias and global diversification. The reason why bidders' leverage potentially influences the global diversification discount is that bondholders are also affected by global diversification.

value firms diversify but still trade at a discount to single-segment firms, even though the diversification creates value. In a similar vein, Graham, Lemmon, and Wolf ~! demonstrate that about half of the observed di-versification discount is due to the discount at which target firms traded before they were acquired by conglomerates.

The discount appears to be the result of firm-level mispricing. Thus, providing an explanation for why, in light of the observed discount, a large number of diversified firms persist.,To the authors’ knowledge, this is the first study to provide evidence that firm-level mispricing may drive the observed diversification discount.In this paper, we have analyzed the reasons of diversification discount.

The investigation has been performed using panel data procedure for a sample of Chinese companies listed on Shanghai Stock Exchange over the span from to We find that diversification discount have two main reasons.

One is the high agency cost, the other is the cost inefficiency.