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Diversification’s Effect on Firm Value

Diversification’s Effect on Firm Value. What are the major results? What’s the contribution? 1. Academic literature 2. Management 3. Investor. Question: should corporation diversify? Pros - value enhancing: operating efficiency internal capital market greater debt capacity

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Diversification’s Effect on Firm Value

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  1. Diversification’s Effect on Firm Value • What are the major results? • What’s the contribution? 1. Academic literature 2. Management 3. Investor

  2. Question: should corporation diversify? Pros - value enhancing: • operating efficiency • internal capital market • greater debt capacity • lower taxes: two sources

  3. Cons – value destroying: • cross subsidization • over investment • mis-alignment of incentives between central and divisional management: because of information asymmetry

  4. Question: will related diversification be better than unrelated diversification? • to share skills, resources, and reputation • economies of scope Past empirical results including event study, accounting performance, and Tobin’s Q produced mixed results!

  5. This research idea comes from the accounting rule: segment data! • Data screening and why? • What can we learn from the sample statistics? • Why should do the industry-adjustment? • Why and how should the tables be self explanatory?

  6. Why are we not satisfied with the difference in mean (median) test between two samples? • Industry multiples and the definition of dependent variable: excess value • The choice of an appropriate accounting item • Why is this method better than event study or Tobin’s Q?

  7. Should we delete the extreme values (outliers)? P.48 • The regression of excess value in table 3: why panel A and B? What are the explanatory variables and control variables? • Be aware of the footnote! Footnote 3 and 4 provide sensitivity (robustness) check. • Herfindahl index? • Are these good proxies? • How to mark the significance level? • Cross sectional vs time series

  8. Why makes table 4? • Why table 5? • Perhaps the segments of diversified firms are less profitable than their counterpart single-line firms? • Further investigation of cross sectional differences in the value loss • How to measure the over investment? • How to measure the cross subsidization? • Will this value loss be mitigated by tax effect?

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