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Corporate diversification and firm performance
... While prior literature has examined the benefits and costs arising from corporate diversification, no consensus has emerged despite the different theories that have been developed to explain the puzzling evidence that diversified corporations trade at lower valuations relative to a portfolio of focused corporations (Lang and Stulz (1994), Berger and Ofek (1995)). 1 A sizable strand of the literature suggests that distorted investment decisions in the form of corporate diversifications could be the result of misalignment of managerial and shareholder interests (Jensen and Meckling (1976)). Diversified firms destroy value because they appear to incubate entrenched managers who diversify at the expense of shareholders to reap private benefits, such as perks and compensation (Jensen and Murphy (1990)), power and prestige (Jensen (1986), Villalonga (2000)), and better career prospects (Shleifer and Vishny (1989), Stulz (1990)), and to reduce their own employment risks (Amihud and Lev (1981)). ...
... Accordingly, overconfident CEOs exhibit not only excessive willingness to overinvest but also an overly large appetite to diversify to avoid the diminishing 2 Potential benefits from diversification arise, for instance, from economies of scope (Teece (1980), Teece (1982), Matsusaka (2001)), debt coinsurance effects (Lewellen (1971), Stein (2003)), internal capital markets (Stein (1997)), and fewer failures in product, labor, and financial markets (Khanna and Palepu (2000)). 3 For the value destruction impact of corporate diversification, see, for instance, Lang and Stulz (1994), Berger and Ofek (1995), Servaes (1996), Lins and Servaes (1999), Rajan et al. (2000), Scharfstein and Stein (2000), and Hoechle et al. (2012). 4 Recent studies, however, question the presence of the diversification discount and suggest that the lower valuations of diversified firms are illusory and the outcome of methodological problems; see, for instance, Whited (2001), Campa and Kedia (2002), Graham et al. (2002), Mansi and Reeb (2002), Villalonga (2004aVillalonga ( , 2004b, Glaser and Müller (2010), and Kuppuswamy and Villalonga (2015). ...
... Second, this study contributes to the empirical literature documenting that diversified firms appear to have, on average, lower valuations compared to a portfolio of standalone firms (Lang and Stulz (1994), Berger and Ofek (1995)) by offering an unconventional explanation based on CEO psychological traits. By documenting that overconfident CEOs show a heightened tendency to undertake more diversification decisions than their rational peers, we point out the underlying channel through which CEO overconfidence destroys firm value. ...
This study presents a theoretical model that links chief executive officer (CEO) overconfidence to the value loss of corporate diversification. Consistent with the model's prediction, the findings show that diversified firms run by overconfident CEOs experience value loss compared to diversified firms run by their rational counterparts. Empirically, the value loss is economically significant and ranges between 12.5% and 14.1%. In addition, the model predicts heightened corporate refocusing activity by overconfident CEOs who pursued diversified investments in the past once realized returns fail to match initial expectations. The empirical odds of corporate refocusing decisions are 67% to 98% higher when past diversifications are undertaken by overconfident rather than rational CEOs. Another prediction of the model is that overconfident CEOs exhibit preference for diversified investments, especially in the presence of ample internal funds. This prediction is also strongly supported by the data. Overall, this study proposes CEO overconfidence as a unified and consistent explanation of why firms pursue value-destructive corporate diversification policies and later adopt refocusing policies aiming to restore value.
... The hypotheses are tested through one set of models' estimation targeting TQ. The definition of the variable refers to the standard financial literature on CFP (Fu et al. 2021;Lang and Stulz 2017;Suzuki and Chida 2017) and is summarized in Eq. (1). ...
... The energy intensity of profits is the Gj over millions of dollars. The control variables comprehend accounting, liquidity, and financial indicators suggested by literature (Cao et al. 2019;Hennessy 2004;Lang and Stulz 2017;Smirlock et al. 2016). The first group used the corporate dimension, leverage, ordinary dividend payouts ratio, and institutional ownership. ...
Decarbonization is often misunderstood in financial studies. Furthermore, its implications for investment opportunities and growth are even less known. The study investigates the link between energy indicators and Tobin's Quotient (TQ) in listed companies globally, finding that the carbon content of energy presents a negative yet modest effect on financial performance. Furthermore, we investigated the effect carbon prices in compliance markets have on TQ for exempted and non-exempt firms, finding that Energy efficiency measures yield greater effects in the latter group. Conversely, it is also true that carbon prices marginally reduce TQ more in non-exempt firms. This implies that auction-mechanisms create burdens that companies are eager to relinquish by reducing emissions. However, reducing GHG yields positive effects on TQ only as long as it results in energy efficiency improvements.
... However, the objective of the company is to improve its financial performance by increasing the ratio. The indicator used in literature to track the companies' progress in promoting their financial performance is the TQ (Fu et al., 2021;Lang & Stulz, 2017;Suzuki & Chida, 2017). In equation 1, it is summarized how it is possible to interpret the TQ. ...
... Electronic copy available at: https://ssrn.com/abstract=4100267 The control variables comprehend accounting, liquidity, and financial indicators suggested by literature (Cao et al., 2019;Hennessy, 2004;Lang & Stulz, 2017;Smirlock et al., 2016). The first group used corporate dimension, leverage, ordinary dividend payouts ratio, and institutional ownership. ...
... Highly diversified industries have a higher value compared to low diversified industries (Allayannis and Weston, 2001;Ayturk et al., 2016;Bartram et al., 2011;Nguyen and Faff, 2010b). This study uses the 1-Herfindahl-Hirschman Index (HH Index) to control the effect of industrial diversification as adopted by Berger and Ofek (1995), Lang and Stulz (1994), and Servaes (1996). The estimation of the HH Index is calculated from firms' sales by segment. ...
... If a firm that uses derivatives belongs to a high-Q industry, for example the technology-intensive industry, the firm is expected to generate more profit due to the industry itself (Lau, 2016). Therefore, to control for industry effect, this study first constructs the industry-adjusted Tobin's Q, then computes the log difference between the weight-adjusted industry Q and multi-segment for each firm (Allayannis and Weston, 2001;Ayturk et al., 2016;Lang and Stulz, 1994). ...
... Highly diversified industries have a higher value compared to low diversified industries (Allayannis and Weston, 2001;Ayturk et al., 2016;Bartram et al., 2011;Nguyen and Faff, 2010b). This study uses the 1-Herfindahl-Hirschman Index (HH Index) to control the effect of industrial diversification as adopted by Berger and Ofek (1995), Lang and Stulz (1994), and Servaes (1996). The estimation of the HH Index is calculated from firms' sales by segment. ...
... If a firm that uses derivatives belongs to a high-Q industry, for example the technology-intensive industry, the firm is expected to generate more profit due to the industry itself (Lau, 2016). Therefore, to control for industry effect, this study first constructs the industry-adjusted Tobin's Q, then computes the log difference between the weight-adjusted industry Q and multi-segment for each firm (Allayannis and Weston, 2001;Ayturk et al., 2016;Lang and Stulz, 1994). ...
... This implies that the size promotes diversification which minimizes risks and allows banks to assist smooth operations (Adusei, 2015). Big size firms are more likely to be efficient as they enjoy economies of scale, employ experienced management and a well-formulated governance body that leads to enhanced performance and value of the firm (Lang & Stulz, 1994;Malik et al., 2020). However, Himmelberg et al. (Himmelberg et al., 1999) argue that smaller firms are more efficient than larger ones because in larger firms the top management loses to control over their operational & strategic decisions related activities. ...
... Besides corporate governance, the study includes control variables that are hypothesized to contribute to the performance and value of banks. The size of a bank is positively and significantly related to bank performance (Adusei, 2015;Kumar, 2011;Lang & Stulz, 1994), while it has a negative but insignificant relationship with bank value (Himmelberg et al., 1999). Thus, our hypothesis H6(a) is accepted, while H6(b) is ...
The study aims to examine the relationship of board structure, ownership structure, and bank-specific variables with bank performance and value. Panel Data is collected from eighteen conventional commercial banks of Pakistan for the time period of 2012 to 2017. The analysis is carried out by employing pooled OLS model estimation, descriptive statistics, and correlation analysis, using Eviews-9, with 108 observations. The board size and board independence are found to have a determinant effect on the bank performance and value. This implies that the larger boards are more likely to improve corporate performance. Also, an ample number of independent directors, in the board of directors, result in better bank performance. The study also reveals that ownership structure does not contribute directly in bank performance and value; however, foreign shareholding is found to have positive relationship with the value of banks which reduces agency problems. Additionally, adequate capital reserves help banks sustain in the market while the size of banks and non-performing loans contribute to bank performance. The study established a link between corporate governance attributes with the performance and market value of banks while taking bank-specific variables as well. This study has an implication for almost all the stakeholders in banks i.e. corresponding banks, shareholders, central banks, practitioners, and academicians. The study includes only conventional commercial banks and can be extended to study the overall financial sector in a setting or in a comparative manner.
... Diversification is a business strategy chosen by the enterprise, and its successful implementation depends on the symmetry between the diversification strategy and other internal management elements. Financial performance may not be stable and excellent in a company with a high degree of diversification, a fact which has been confirmed by relevant studies [25][26][27][28]. This indicates that the use of a diversification strategy cannot significantly and positively affect financial performance. ...
... Financial performance was set as the explained variable. Financial performance can include return on asset (ROA) [38], return on equity (ROE) [39], and Tobin's Q [28]. Among numerous financial indicators, the ROA indicator is comprehensive and can reflect the capital structure, operating results, and operational efficiency of enterprises. ...
Diversification is a strategy adopted by many enterprises in the process of expansion. The success of the diversification of an enterprise mainly depends on the choice and implement of strategy; choosing an organizational structure that fits the type of diversification strategy used is fundamental to improving financial performance. Based on the empirical research method, this study establishes a symmetric model of diversification strategy and organizational structure on financial performance and selects data from 613 A-share-listed companies in China, from 2012 to 2016, to test the impacts of unrelated and related diversification strategies on financial performance, as well as the moderating effects of united company, holding company, and multidivisional structures on such relationships. The results show that there is asymmetry between the diversification strategy adopted and financial performance, and a related diversification strategy should be adopted as a priority; the symmetry of an unrelated diversification strategy and holding company structure on financial performance is partially confirmed, and other elements should be adopted, simultaneously, to improve this symmetry; a related diversification strategy and multidivisional structure on financial performance is symmetric. The above findings will provide references for the diversification strategy choice and the organizational structure design of enterprises.
... The relationship between firm size and firm value is mixed. Berger and Ofek [40] and Ferreira and Matos [3] find that firm size is positively related to firm value, while Lang and Stulz [41] find that firm size is negatively related to firm value. We control for leverage (Leverage); its relationship with firm value is mixed. ...
... Specifically, the coefficient on Control_Own is negative and significant, indicating that firms with higher controlling shareholders' ownership have lower firm value. Consistent with the finding in Lang and Stulz [41], we find a negative and significant coefficient on Firm_Size in columns (1) and (3). These findings indicate that larger firms have lower firm value. ...
This study examines the link between foreign ownership and firm value in the context of dividend payouts and long-term firm growth. Consistent with prior studies, we find that foreign ownership is positively related to firm value. Next, we find that changes in foreign ownership are negatively related to changes in agency costs, which is linked to the improvement of future firm profitability. We also find a positive relationship between foreign ownership and dividend payouts. We further find that dividend payouts are negatively related to 3-year-ahead and 5-year-ahead sales (or earnings) growth as a proxy for long-term firm growth. However, for firms with high foreign ownership, we find a positive relationship between dividend payouts and long-term firm growth. These findings indicate that foreign ownership has a moderating effect on dividend payouts and long-term firm growth. Overall, our results suggest that foreign investors are expected to provide managers with an incentive to pursue long-term value for the sake of shareholders by monitoring and disciplining managers. Our study contributes to a better understanding of the value-increasing effects of foreign ownership on firm value by demonstrating that the reduction in agency costs due to the foreign ownership effect is associated with higher growth rates and thus higher firm value. Our study also contributes to the literature on the foreign ownership–firm value nexus by showing that foreign investors play a crucial role in ensuring sustainable firm growth.
... Le American Journal of Industrial and Business Management tion, the more unfavorable the company's performance improvement. Lang and Stulz (1994) used the "franchise store method" to innovate the Tobin'Q value. ...
... The research concluded that the Tobin'Q value of diversified companies is lower than that of specialized enterprises, and the value created is relatively low [26]. Comment and Jarrel (1995) use the effect of diversification on stock price returns as a research method, and find that the higher the degree of diversification, the lower the return rate of stock prices [27]. ...
... Les opérations de diversification permettent généralement à l'entreprise initiatrice d'acquérir de nouvelles activités, minimiser le risque opérationnel et par conséquent limiter les pertes en cas de mauvaise conjoncture liée à l'activité principale de l'entreprise (Shleifer et Vishny (1986)). La recherche académique montre néanmoins une réduction de valeur associée à la diversification industrielle (Lang et Stulz (1994); Berger et Ofek (1995); Denis et al. (1997)). Cette réduction s'explique en grande partie par le degré élevé de l'asymétrie d'information due à la complexité du fonctionnement et de la gestion prévisionnelle des entités de différents secteurs ( Nam et al. (2006)). ...
... Ces analyses montrent des RAC significativement négatives pour l'échantillon total en cas de diversification (moyenne = -1,32 ; t-stat = -1,94) et encore plus négatives en cas de diversification associée à un faible score de gouvernance (moyenne = -2,24 ; t-stat = -2,27). Ces résultats confirment la réduction de valeur dans le cas de la diversification des activités (Lang et Stulz (1994); Berger et Ofek (1995); Denis et al. (1997); Bae et al. (2002)). ...
... However, considering that BUs are not separately listed in the capital markets, data on betas at the BU level of a firm is not available. In this context, previous research tackled issues with data unavailability at BU level by calculating industry averages for single-business firms and then applying these averages to the BUs' matching industries (D'Mello et al., 2017;Lang and Stulz, 1994;Rajan et al., 2000). We follow this approach and calculate yearly industry averages of single-business firms' 60 months betas at the one-digit SIC code classification level 17 and apply them to the BU's matching industries. ...
... These industry averages might differ from the actual risk profiles of a firm's BUs. Still, as capital market related information at the BU level is unavailable, we follow previous research and consider industry averages of single-business firms' as an accurate proxy (D'Mello et al., 2017;Lang and Stulz, 1994;Rajan et al., 2000). ...
While recent studies indicate that value-based management (VBM) helps owners in aligning managerial action (i.e., control function), little evidence is provided for VBMs’ proposed support in managerial decision-making (i.e., decision-making function). Arguing that the depth of VBM implementation determines its benefits, we investigate whether a deeper implementation of VBM helps to realize its decision-making function. We investigate our research questions on a dataset of 1,107 divestitures by European firms as divestitures allow analyzing managerial decision-making in a situation where managers’ self-interest is less pronounced. Our empirical results indicate that a VBM implementation down to the business unit level improves divestiture performance, while we find no such effect if VBM is only implemented at the corporate level. Further empirical tests indicate that the dispersion of capital costs across a firm’s portfolio positively moderates VBM’s impact on divestiture performance. In sum, our results indicate that VBM can provide support in managerial decision-making when firms consider its depth of implementation.
... Consequently, conglomerates can make more value-increasing investments than their individual segments would be capable of making independently (Stein 1997;Stulz 1990;Weston 1970). Moreover, internal markets also allow for more efficient allocation of other resources, including human capital (Lang and Stulz 1994). ...
Despite the current trend toward refocusing on the core business, the empirical results on the conglomerate discount are conflicting and provide opposing implications to managers as to whether they should pursue diversification or not. Prior literature has employed various research designs, all of which have the potential to impact results. In this study, we analyze which design choices affect the conglomerate discount. We analyze a sample of approximately 6000 German firm-years between 2000 and 2019 and find a conglomerate discount of 7.9–11.5%. Our findings reveal that design choices related to self-selection have the highest impact on the results. Using a 2SLS approach, we find no causal relationship between diversification and market value despite testing various sets of instruments and excess values. Our results inform practitioners and researchers regarding the impact of design choices on the magnitude and existence of the conglomerate discount.
... Due to insufficient resources such as physical, human, or organizational capabilities, micro-sized logistics enterprises have weak strength in the 800 billion less-than-truckload (LTL) market in China [28]. For one thing, as the "escape hypothesis" suggests that firms that experience poor prior performance in current industries are likely to prefer unrelated diversification [29] [30]. For another, compared with tangible resources with higher transfer costs and limited scope economic effects, the cost of transferring or integrating intangible resources is lower, which is the growth path of micro-sized enterprises to avoid industry barriers and risk, obtain superior performance and market advantages [20] [31]. ...
... Staying in that comfort zone makes bidders vulnerable to opponents whose M&As coevolve with markets. Yet, a sequence of diverse market-entering transactions is also tricky because it makes knowledge nontransferable -prior research often shows it brings adverse results (Lang & Stulz, 1994;Hayward, 2002). To sum up, there is an inverted Ushaped relationship between the (1) similarity of businesses of past and current mergers, (2) prior and present performance, and (3) the time elapsed. ...
... In a conglomerate, resources can be allocated more effectively and capital can flow from projects with lower marginal returns to projects with higher marginal rates (Mueller, 1967). In contrast, Va and Ofekb (1995) and Lang and Stulz (1994) found that diversified firms trade at a discount relative to non-diversified firms in their industries. Other findings also confirm the existence of this discount on diversified firms, and this result seems to be robust to different periods and different countries (Kruse, Park, Park, & Suzuki, 2007;Servaes, 1996). ...
The purpose of this paper is tantamount to study whether mergers and acquisitions (M&A) improve the financial performance of Chinese listed companies. We use panel data regression to examine 434 completed M&A activities from 2012 to 2016 initiated by Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges. The evidence indicates that, on average, the firm performed better after the M&A activities. We further divide all sample enterprises into three different types of M&A. The results demonstrate that when other conditions are unchanged, horizontal M&A and conglomerate M&A are positively related to firm performance. Our results suggest that the firm can benefit from horizontal M&A through economies of scale in operations while financial synergies following the conglomerate M&A enhance the firm performance. The findings deepen our understanding of the consequences of M&A and provide evidence that it is an important corporate growth strategy for the Chinese capital market.
... Shareholders want the firm to have a high performance so that their wealth can be maximized. [1] suggest that one of the ways to improve corporate performance through diversification strategy. [2] explained that the purpose of diversification is to increase substantial profit so that it could increase the welfare of shareholders. ...
... Karena itu, dari hasil analisis atas keandalan output untuk pengujian model keseluruhan tersebut, dapat diambil simpulan bahwa model untuk mengestimasi data dengan tanpa memasukkan variabel kontrol adalah good fit atau baik. (Lang & Stulz, 1994, Berger & Ofek, 1995, dan Servaes, 1996 ...
The objective of this study is to examine the effect of diversification and insider ownership on firm value. The sample used in this study is 95 firm's annual reporting from companies listed in Jakarta Stock Exchange in 2015. Structural Equation Approach used in this study to examine the effect of diversification and the other variable together on the firm value and the corporate governance.The results of this study show that diversification significantly affects the insider ownership. Furthermore, business diversification negatively significant affects the firm value. On the other hand, I find no evidence of the effect of diversification on the corporate governance index. The result of this study is different from the previous study in another country. The different result may be caused by the different international corporate governance practice.
... As a result, the share price will drop due to investors cashing out and affect firm's performance. The financial position of firms will turn to worsen if their diversification does not yield positive financial performance (Berger & Ofek, 1995;Lang & Stulz, 1994). ...
Corporate diversification is a strategy that enables corporations to expand their core business into
other businesses. In Malaysia, corporate diversification continues to represent a fundamental organisational
structure. Some two-thirds of Malaysian firms are diversified. However, when compared to developed countries
such as the U.S. and the UK we find that firms are moving towards non-diversification. The study is based on
the population framework consisting of all of the public limited companies (PLCs) listed on the Bursa Malaysia
stock exchange from 2007 to 2012. A dynamic panel model system generalized method of moments (GMM)
was used to analyse the corporate diversification and key determinants. The research provides answers to close
the literature gaps, by using entropy and relatedness, which reflected the actual degree of diversification better
than those studies that used conventional dummy variable methods and were unable to explain the degree of
the diversification and key determinants. The empirical findings demonstrated that diversification is better
than non-diversification firms for the curvilinear relationship between diversification and firm performance
(ROA and Tobin’s Q) when using entropy index and relatedness is taken into consideration. The research
further concluded that the relationship of free cash flow (FCF) and growth opportunities has a similar positive
effect toward corporate diversification.
... Dans un travail pionnier sur la population des 200 premières entreprises américaines, Rumelt[1974] avait observé que les entreprises enregistrant les meilleures performances financières sont celles qui sont diversifiées dans des activités cohérentes. Ce résultat a été retrouvé plus récemment par Wernefelt et Montgomery[1988],Lang et Stulz [1994], Markides et Williamson[1994], sur des populations d'entreprises différentes, pour d'autres périodes et d'autres indicateurs de performances (notamment, le "q" de Tobin) et de cohérence84. Ces études confirment donc l'intuition de la faible pertinence des stratégies de diversification tous azimuts (logique conglomérale) et de l'intérêt de fonder la diversification de l'entreprise sur une logique d'exploitation de compétences générales. ...
... We require sample firms to have at least two business segments. Following [30][31][32], the following sample selection criteria is applied: ...
... The diversification performance research spans a number of business disciplines. First, the performance of diversified firms had been examined (Lang and Stulz, 1994 ;Nayyar, 1992) which was followed by the study on performance differences between related and unrelated diversification (Li and Yue, 2008 ;Qian, 2002 ). The diversification was also examined by market and product diversification (Kim et al., 2004 ;Dastidar, 2009 ). ...
Organizational Politics is a natural occurrence in organizations and when carried to the extreme, it can damage relationships among individuals; this study sought to identify the
effect political behavior has on employee performance. The population studied consists of 400 staff of the selected banks based in South-East Nigeria. Descriptive research approach was adopted and a questionnaire was structured and distributed through stratified random sampling to participants of the two firms using five point likert scale. . Z- test statistics was used to analyze the data. The rationale for using this, is to compare different population of mean existing within the groups and between the groups. In the case of Zenith Bank Plc. Based on result, decision rule was applied to reject the null
hypothesis and accept the alternative hypothesis. In the case of First Bank Plc, study found that Z-calculated (1.144) value was greater than Z-tabulated (2.048) value at 5 % significant level of precision. Decision rule was applied to accept the null hypothesis and reject the alternate hypothesis. Comparing the result of the two private firms, study concluded that there exists strong significant relationship between political behavior and employee perceived performance in Zenith Bank Plc; study also found that, there exists no significant relationship between political behavior and employee perceived performance. The study recommends that political behavior can be avoided by maintaining level playing ground that can accommodate everyone, achieved by designing good working conditions based on ethical standards.
... The methods used to investigate diversification typically calculate implied market-to-book or implied firm value (Berger and Ofek, 1995;Lang and Stulz 1994) and show a discount, on average, for diversified firms. A second wave of research questioned these findings. ...
Purpose
The purpose of this study is to compare two theories that relate the proportion of diversified firms in the economy and the implied discount for diversified firms: the first is a real-options model predicting a positive relationship between the discount and management’s choice to operate a diversified firm; the second is based on catering theory, in which a negative relationship is predicted, as management is attentive to investor preference concerning diversified firms.
Design/methodology/approach
This study proposes a new aggregate measure of the diversification discount. The authors’ measure allows for decomposition of the discount into firm-level mispricing, industry-level mispricing and long-run fundamental value components.
Findings
Results support a catering theory of diversification. 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.
Originality/value
To the authors’ knowledge, this is the first study to provide evidence that firm-level mispricing may drive the observed diversification discount.
... (Agrawal et. al., 1992;Lang & Stulz, 1994;Dmitry & Comes, 2002). There are evidences that performance of some firms improved after diversification. ...
... In order to measure the diversification of adaptation activities for each household, we count the number of farming practices contained in each category and construct a normalized Herfindahl-Hirschman Index (HHI). This approach has been extensively used to study corporate performance involving diversification [48,49,50]. Its application in agriculture has also been explored with regard to the diversification of crops [24,25]. ...
Smallholder farming systems are vulnerable to a number of challenges, including continued population growth, urbanization, income disparities, land degradation, decreasing farm size and productivity, all of which are compounded by uncertainty of climatic patterns. Understanding determinants of smallholder farming practices is critical for designing and implementing successful interventions, including climate change adaptation programs. We examine two dimensions wherein smallholder farmers may adapt agricultural practices; through intensification (i.e., adopt more practices) or diversification (i.e. adopt different practices). We use data on 5314 randomly sampled households located in 38 sites in 15 countries across four regions (East and West Africa, South Asia, and Central America). We estimate empirical models designed to assess determinants of both intensification and diversification of adaptation activities at global scales. Aspects of adaptive capacity that are found to increase intensification of adaptation globally include variables associated with access to information and human capital, financial considerations, assets, household infrastructure and experience. In contrast, there are few global drivers of adaptive diversification, with a notable exception being access to weather information, which also increases adaptive intensification. Investigating reasons for adaptation indicate that conditions present in underdeveloped markets provide the primary impetus for adaptation, even in the context of climate change. We also compare determinants across spatial scales, which reveals a variety of local avenues through which policy interventions can relax economic constraints and boost agricultural adaptation for both intensification and diversification. For example, access to weather information does not affect intensification adaptation in Africa, but is significant at several sites in Bangladesh and India. Moreover, this information leads to diversification of adaptive activities on some sites in South Asia and Central America, but increases specialization in West and East Africa.
... Table 1 defines all variables used in the model. Tobin's q is a common measure of firm performance [63][64][65][66][67][68]. In addition, to the extent of diversification (TD), we use managerial ownership (MAR), ownership of directors (BOR), firm size (SIZE), growth opportunity (GROW), and debt ratio (DA) as control variables. ...
This study has thoroughly studied the previous literature on corporate diversification and firm’s performance in different countries like, USA, EU, China, Malaysia and Bangladesh. To investigate the effects of different factors those affected the diversification decision/strategy of firms we have taken data of 465 firms from India, Sri Lanka and Pakistan in order to check how different factors affected the diversification decision of manufacturing firms across south Asian countries. Data was collected from financial statements of different firms and stock exchanges which is available at their websites and also from data banks. Present study is secondary in nature and 16-years data is collected from 2001 to 2016 of different firms. A two stage regression analysis is used with the dependent variable of “MAR, BOR SIZE GROW etc.”. Results showed that variables i.e., managerial ownership, director ownership, size, and grow, debt ratio and firm risk found significant association with corporate diversification and firm performance. It is evidence found that all these variables have significant impact on the corporate diversification and firm performance across south Asian countries. From whole study and results we can say that diversification is deployed as strategy to reduce firm specific business risk. The increased volatility and aggressiveness of the industry has made the industry more endangered to fluctuations in demand, thereby aggravating the situation and making survival more pivotal. In order to survive in such aggressive environment, manufacturing industries must have resonated strategic planning and management frameworks. A firm’s survival is dependent upon its ability to adjust successfully to the changing environment, whereas strategic planning and managerial capabilities are tools to survive in such challenging environment.
... Leverage is measured as the ratio of total debt to total assets. We also include Tobin's Q to control for investment and growth opportunities, because it diverges considerably across countries and captures important elements of firm performance [57,58]. Tobin's Q is measured as the sum of a firm's market capitalization, total liabilities, preferred equity and minority interest divided by total assets. ...
... Further, diversified firms have lower q values than comparable portfolios of pure-play firms. … We find no evidence supportive of the view that diversification provides firms with a valuable intangible asset" (Lang and Stulz, 1993). In a study of property-casualty insurers, Liebenberg and Sommer (2008) consider line-of-business diversification and find that more focused firms have higher performance levels. ...
This study focuses on family control and ownership patterns in the U.S. insurance industry. Conflicting theories argue that family firms perform worse due to nepotism and weak risk-bearing attributes (Agency theory) or that family firms perform better because the unity of ownership and control reduces agency expenses (Stewardship theory). Our findings support the Stewardship view of the firm. Our findings also demonstrate that CEO-Chairperson duality improves performance but that the combination of family and duality is sub-optimal. We further study implications of institutional investor and insider ownership, compensation structure, and leverage on performance.
This study empirically explores the effects of bank funding diversity on Vietnamese commercial banks’ profitability and risk in the context of the COVID-19 pandemic. The panel regression method was used to analyze quarterly data from 27 Vietnamese commercial banks from Q1-2016 to Q1-2021. The study findings demonstrate that commercial banks with diverse financing sources are more profitable and riskier. In the meanwhile, the COVID-19 outbreak did not diminish the short-term profitability of Vietnamese commercial banks, but it did increase their exposure to risk. On the basis of the empirical findings, this paper also proposes a number of strategies to assist Vietnamese commercial banks in operating more effectively and securely in the context of the COVID-19 pandemic.
This paper examines whether cultural dispersion of a multinational firm affects its stock trading in the market. The result shows that the stock liquidity negatively relates to the degree of cultural dispersion, suggesting it is costlier to trade stocks of culturally diverse firms. Among five measures of stock liquidity, Chae's (2005) turnover measure demonstrates the most consistent effect after addressing potential omitted variables and selection biases. A robustness test that extends our sample to include purely domestic firms confirms the main result of the negative effect of cultural dispersion. Furthermore, while the relation between cultural dispersion and stock liquidity may not be exactly linear, such a negative association overall holds. In addition, the influence of cultural dispersion on stock trading takes effects mainly through the agency and external information environment channels and is more pronounced for lower risk‐taking multinationals. This result has three practical implications for investment management. First, it is important to consider the internal cultural diversity when investing multinational firms. Second, the evaluation of firm liquidity goes beyond financial fundamentals or market mechanism. When a firm increase its degree of informational complexity and unfamiliarity, it tends to decrease its attractiveness to investors. Last but not least, when investing globally, cultural differences is an important consideration. Using stock liquidity as a research platform, this study suggests that the effect of cultural difference is indeed material.
Exploiting demand shocks from changes in federal government spending, we examine how the organizational structure of a firm affects its investment behavior. Government spending shocks affect the investment of government-dependent conglomerate segments less than matched stand-alone firms. Investment also increases in lower government-dependent segments when other segments within the same firm experience positive demand shocks, indicating cross-subsidization between segments. We further show that this cross-subsidization leads to worse operating performance and increases the diversification discount. Our findings are robust after addressing the endogeneity of government spending.
This study examines the influence of financial derivatives on the value of Shariah (ShC) and non-Shariah (non-ShC) compliant firms in Malaysia and compares the influence of derivatives on value between the two categories of firms. To achieve its objective, System-GMM estimator is employed on a panel data from 2000–2017. This study finds financial derivatives contribute positively to the value of ShC but negatively to the non-ShC compliant firms. Following this, the study concludes that ShC firms performed better than its counterpart in risk management using derivatives. The findings enhance the current literature on the risk management of firms in the Islamic capital market and provide further insights on hedging activities.KeywordsRisk managementDerivativesHedgingFirm valueShariah compliant firms
I use an accounting reform to assess the agency cost of debt in diversified firms. Those firms that switch from single to multiple segments following the reform suffer a 12% increase in their bond spread when compared with their stand-alone peers. Consistent with lenders anticipating underinvestment and asset-substitution incentives, diversified firms with high cash-flow volatility across divisions suffer the highest increase in borrowing costs. I employ a novel approach that allows abstracting from unobservable characteristics that would otherwise influence the pricing of diversified firms’ debt.
Research Summary
We examine the effects of founder teams' firm- and industry prior work experience on startup growth in the context of high technology industries. We study these effects both on the early growth of startups and on their growth, after accumulating experiential knowledge. Integrating the literatures on human capital, imprinting and competency traps, we develop a typology of four combinations of founder prior experience: founder same firm and same industry experience, founder same industry but other firm experience, founder same firm but other-industry experience, and founder other-industry and other firm experience. Using data from 153 Israeli high technology startups, we find significant variations in the effects of these combinations on startup growth, which also vary between the early and later years of these startups.
Managerial Summary
Founders play a key role in the lives of their startups, applying their resources, knowledge and experience. Therefore, we ask: how does founder experience influence high technology startups’ growth? To answer this question, we examine four combinations of founder prior experience: founder same firm and same industry experience, founder same industry but not same firm experience, founder same firm but other-industry experience, and founder other-industry and not same firm experience. Our analyses show significant differences in startup growth based on these combinations of founder prior experience and, importantly, the effect of these four combinations on startups’ growth in their early years of existence differs significantly from later years, when these firms can increasingly draw on their own experiential learning.
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This paper examines how a concentrated tenant base affects the operating performance and market valuations of US REITs. We observe that REITs adopting a concentrated tenant base present higher corporate cash flows and lower expenses. However, we identify a concentration discount effect that REITs with a more concentrated tenant base experience lower market valuations. We argue that this concentration discount is a result of the trade-offs between the impacts of the tenant base on the operating performance, risk levels and growth potentials. We find that a concentrated tenant base is associated with higher liquidity risk and lower dividend growth, resulting in an inflated discount factor. Our findings are not subject to sub-samples of focused or diversified REITs and stay robust after correcting for the selection bias as well as controlling for the lease structure, tenant quality and anchor tenant effect.
Research question: In this short article, we explore whether highly diversified professional football clubs, from an investor perspective, are better prepared for an unpredictable global crisis such as the COVID-19 pandemic than undiversified clubs.
Research methods: We apply event study methodology to analyze stock market reactions at football clubs during the first wave of the COVID-19 pandemic.
Results: Analyzing a dataset comprising 5,380 daily stock returns of 21 publicly listed football clubs in Europe during the season 2019-20, our results suggest that investors prefer stocks of clubs with high levels of product diversification during the COVID-19 shock period. Vice versa, we observe a moderate negative effect of geographic diversification, i.e., a club’s internationalization efforts. Both effects are robust across various model specifications and after adding several control variables.
Implications: In the future, football executives may want to increasingly apply product diversification strategies to prepare for future crises better. In contrast, at least during a global health crisis, further expansion to international markets requires caution.
In this chapter, we review the main findings of empirical studies of asset sales. Nonfinancial firms generally sell individual assets or a portfolio of real assets (e.g., timberland, natural resources, buildings, ships, airplanes, factories, plants, machinery, equipment), while banks can sell either real or single financial assets or a portfolio/package of them (e.g., treasury securities, bank loans, equity stakes, derivative portfolios). However, it is not uncommon for firms to dispose of complex combinations of real, financial, and human capital assets (e.g., product divisions, bank branches, trading desks, asset management units). We provide empirical evidence supporting both the efficiency theory and financing theory for both types of sellers.
Diversification involves ongoing decisions about firm boundaries and relatedness. We develop a theoretical model that uses a real-option framework combined with optimal mechanism design to analyze how choices of boundaries and relatedness affect firm performance in the face of tradeoffs between governance and flexibility. We find that: (1) optimal boundaries and relatedness are substitutes in determining firm performance; (2) the association between relatedness, the most commonly studied aspect of diversification, and firm performance is indeterminate; (3) the substitution between relatedness and boundaries declines as noise in internal communication increases; (4) variation in relatedness has greater impact than boundary size when headquarters can pick multiple winners; and (5) as the internal market for information becomes more efficient, the lower the value of relatedness in combination with small boundaries. The general conceptual implication of these points is that corporate governance interacts with firm relatedness and boundaries in generating diversification performance.
Research summary
This article investigates how diversified firms reallocate internal non‐scale free resources when one of their product business units (BUs) experiences increased exposure to international competition driven by a sharp decrease in trade tariffs. On average, firms tend to fight, by reallocating resources toward the BU affected by the trade shock and away from other BUs within the same firm. Two variables moderate this first‐order effect with opposite signs. The level of sunk costs of the assets allocated to the BU affected by the shock is a positive moderator of resource reallocation to it. The presence of technological synergies between the BU affected and the rest of BUs instead moderates the relationship negatively. This negative moderation seems to only take place when competition increases the value of technology as a competitive resource.
Managerial summary
An important question in the strategic decision‐making process of diversified firms is how to react to competitive threats that affect one business unit but not the others. Should managers allocate more resources to the affected business or should they instead reduce their commitment and use the same resources in the remaining operating sectors? In this article we examine firms’ reallocation decisions following increases in foreign competition due to import tariff cuts. Our results show that firms tend to allocate more resources to the business affected by the tariff cut and less to the businesses unaffected. Furthermore, we find evidence that this behavior is positively associated with performance.
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We identify situations in which auditor industry specialization could be detrimental for audit outcomes. We predict that during periods of heightened industry-specific risk, specialist auditors from the affected industry could struggle to secure and allocate sufficient resources to mitigate the heightened risk because they have client portfolios concentrated in the affected industry. Using a measure of office-level industry concentration/specialization (as opposed to a market-based measure), we find that banking auditor industry specialization is associated with higher audit quality and more timely audits during the period before the financial crisis. However, during the financial crisis, banking industry specialization is associated with lower audit quality and less timely audits. Collectively, our results suggest that auditor industry specialization can be detrimental in certain circumstances and that audit firms and audit regulators should consider whether the audit markets have become too specialized to handle the resource allocation problems that crisis situations present.
This paper examines the location effects on firm performance (sales, employment and market value) by analyzing geographical and technological proximities in the US medical device industry. The nature of technology is introduced as a new way to scrutinize the impact of various proximities, and the findings indicate that the geographical and technological proximity in itself does not affect performance, whereas the spatially-mediated technological proximity, characterized by the technological proximity within a cluster, positively influences the performance of medical device firms. The paper addresses an important theoretical question. It consequently contributes to the effects of different proximities and nature of technology on firm performance and provides relative managerial implications interlocked with insights obtained from the medical industry. © 2018
In accordance with the strategic importance of corporate social responsibility (CSR), multiple CSR studies have existed in the tourism and hospitality literature. Although appropriate CSR strategies and stakeholders’ interests and perceptions with regard to CSR may differ from one national culture to another, CSR studies incorporating cultural influences are still rare in the tourism and hospitality field. Particularly, given a high degree of internationalization and cultural diversity of stakeholder groups in each local market, CSR study on the basis of national culture is needed in the tourism and hospitality industry. In order to enrich CSR literature and provide practical implications, this study aims to propose a culture-based CSR implementation model for the hospitality and tourism firms, incorporating national culture.
We document a strong decline in corporate-diversification activity since the late 1970s, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.
Using a sample of 5,752 Taiwanese firm-year observations over the 2008 to 2012 period, we examine whether and how the existence of D&O insurance may affect firm performance. Our results suggest that whether to purchase D&O insurance is an endogenous corporate behavior, D&O insurance is not significantly related to firm performance. In addition, we find that firms with higher cash ratio, larger and more independent board are more likely to purchase the D&O insurance, while older firms are less likely to buy the D&O insurance. Our study implies that the government should not require firms to buy the D&O insurance. Instead, government should allow firms themselves to decide whether they optimally should purchase D&O insurance or not based on each firm’s particular circumstances. Firms should also not just simply follow their peers to buy the D&O insurance. They should carefully compare the benefits and costs of the D&O insurance based on their own situations, and only buy the insurance when the benefits exceed the costs.
Many studies have been performed to explore how firms transform from a nongreen strategy to a green one, but there is no definitive answer. Aiming to untangle this complex process in the context of the strategy and belief that being green is an important endeavor, this study details how firms implement green strategy from product diversification to innovation under the pressure of environmental regulations. Consistent with our arguments, data from Chinese listed firms reveal that environmental regulations create pressure for resources and managerial skills to be split between diversification and innovation strategies, which leads to innovation at the cost of diversification. This tension is strengthened when the firm has insufficient slack resources and faces strong environmental dynamism. Furthermore, we find that the innovation strategy increasingly substitutes the loss of the downsized diversification strategy. In addition, these effects show the differences between sectors and the dynamic change over time.
Purpose
The purpose of this paper is to investigate the causal relationship between extent of diversification and performance among Indian companies. The key issue is to find out whether diversification provides irresistible opportunities to increase firm performance or is it the superior profitability that motivates management to diversify.
Design/methodology/approach
Product diversification is calculated by using Entropy index measure. To measure joint endogeneity of corporate diversification and firm performance, both variables are treated as endogenous in a simultaneous equation model.
Findings
The results report that the association between diversification and performance turn strongly significant and positive after controlling the issue of endogeneity. The study finds a strong two-way relationship between extent of diversification and firm performance. As indicated by the results, the extent of diversification is positively related to performance, thereby implying that diversified firms experience a significant diversification premium. The study also demonstrates a positive relation of performance and total diversification indicating that good performance leads to greater diversification.
Research limitations/implications
Certain variables such as R&D intensity, export intensity and risk could not be included in the analysis for want of data. Inclusion of these independent variables could have strengthened the model and its implications.
Practical implications
The results strongly implicate/recommend the managers of developing countries to adopt the strategy of diversification to overcome institutional inefficiencies prevailing in their domicile environment. Corporate heads must also capture the correct timings/dynamism in environment before pursuing diversification as a strategy of growth. There exists causality between diversification and performance; hence, profitable firms should capitalize synergetic effects of diversification strategy and use it as a medium of growth.
Originality/value
There was hardly any literature available on causal relationship between diversification and performance with respect to emerging countries. There was even a wider gap specifically in relation to India where none of the researchers has so far studied causality between diversification and performance controlling endogeneity.
The financial theory (Modigliani & Miller, 1958) rises that risk management was not an issue for companies because shareholders could make their own hedging management through portfolio diversification; however, further studies conflict with that statement and show that corporate financial hedging improves performance and increases the value thereof (Ahmed, Azevedo, & Guney, 2014; Allayannis & Weston, 2001; Allayannis & Ofek, 1998). Efficient management of market risks, which is based on the use of financial derivatives, demands strategic and efficient managers in hedging that adds value to the firm, especially in against shocks and imbalances from a macroeconomic and financial nature. Empirical evidence analyzes the performance of the Q-Tobin as an indicator of the effect of hedging strategies of exchange rate associated to the market value. This paper aims to find evidence in Colombia on the effect of using derivatives in the market value of the firm. Its added value lies in the analysis made by economic sectors, identified by CIIU codes and grouped into 5 sectors (Agricultural, Commercial, Industrial or Manufacturing, Services and Construction). The methodology includes several models estimating regression panel data, using a Pooled regression with estimators of fixed and random effects by maximum likelihood estimator. In general, it was found a premium due to hedging, statistically and financially significant, for companies exposed to exchange rate risks that use derivatives by an average of 6.3% on the market value. Moreover, mixed results were found regarding the analyzed variables in the model. © 2017 Universidad Nacional Auto´noma de Me´xico, Facultad de Contaduri´a y Administracio´n.
The article shows that outside ownership of media moves in stages – from media properties as the mouthpiece for personal and business interests, to a second stage of conglomerates seeking economic “synergies” of performance, to a third stage dominated by financial portfolio diversification. These phases of outside media ownership correspond to the stages of economic development in that country.The article finds that in rich countries, the ownership of media by industrial companies as a way to create political influence has been declining. The second phase, based on economic synergies, has become a less significant driver, too. On the other hand, there has been a significant growth of cross-ownership through financial intermediaries. In contrast, the media systems of emerging and developing countries are still operating in the first two phases of cross-ownership, centered on projection of influence and on conglomerate business synergies.It is quite likely that these dynamics will lead to a “capture gap” between emerging and rich societies. Media in the former would be significantly more captured through the seekers of personal influence and conglomerate synergies, while media in the latter are subject to professional investors imperatives of profitability, growth, predictability, and fit into portfolio diversification. The same financial institutions from rich countries are also likely to seek acquisitions in the emerging markets by leapfrogging the two other stages. The likely responses are restrictions on foreign ownership of media. Domestic conglomerates will step in and assume control. Media capture will then become patriotic.The article is fact-based and provides details on the media assets of non-media companies in 26 countries accounting for about 60% of the world’s population and over 80% of its economy.
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