Product Demand Sensitivity and the Corporate Diversification Discount

2019 ◽  
Author(s):  
M. Kabir Hassan ◽  
Neal Maroney ◽  
Ibrahim Siraj
Keyword(s):  
Corporate Diversification ◽  
Diversification Discount ◽  
Product Demand ◽  
Demand Sensitivity

Corporate diversification

2018 ◽  
Vol 17 (3) ◽  
pp. 405-424 ◽  
Author(s):  
Garrett C.C. Smith ◽  
Jeffrey M. Coy
Keyword(s):  
Design Methodology ◽  
Negative Relationship ◽  
Corporate Diversification ◽  
Diversification Discount ◽  
Firm Level ◽  
Content Type ◽  
Long Run ◽  
Fundamental Value ◽  
Diversified Firms ◽  
Investor Preference

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.

scholarly journals Technological Specialization and the Decline of Diversified Firms

2018 ◽  
Vol 53 (4) ◽  
pp. 1581-1614 ◽  
Author(s):  
Fernando Anjos ◽  
Cesare Fracassi
Keyword(s):  
Growth Rate ◽  
Dynamic Model ◽  
Output Growth ◽  
Corporate Diversification ◽  
Diversification Discount ◽  
Diversified Firms ◽  
Technological Specialization ◽  
Over Time

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.

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