Benefits or costs? The effects of diversification with cross-industry knowledge on corporate value under crisis situation

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zhi Li ◽  
Jiuchang Wei ◽  
Dora Vasileva Marinova ◽  
Jingjing Tian
Keyword(s):  
Tacit Knowledge ◽  
Firm Value ◽  
Corporate Diversification ◽  
Public Companies ◽  
Content Type ◽  
Corporate Transparency ◽  
Crisis Situation ◽  
Unrelated Diversification ◽  
Knowledge Barriers ◽  
Diversified Firms

Purpose This paper aims to explore the explanations of “information effect” and “agency effect” of corporate diversification with cross-industry knowledge under a crisis situation. Design/methodology/approach Based on an event study of 203 public companies’ crises in China between 2008 and 2018, the authors verify the information and agency effects of corporate diversification under a crisis situation by, respectively, examining the effects of interactions of corporate unrelated diversification with corporate transparency and knowledge deficiency attribution on the stock market’s responses to the crises. Findings It is found that corporate unrelated diversification serves as a buffer in protecting firm value while attribution of knowledge deficiency can be a burden. The buffering effect is stronger when the corporate transparency is higher but weaker when the crisis is attributed to be caused by corporate tacit knowledge deficiency. Practical implications Unrelated diversified firms should strengthen information communication with stakeholders so as to break down the stakeholders’ cross-industry knowledge barriers, and thus protect their own value at the crisis’ onset. Also, they can further buffer the loss by reducing stakeholders’ perceptions of the corporate tacit knowledge deficiency revealed in the crisis. Originality/value This study is the first to illustrate that the information and agency effects of corporate diversification strategy can be partially explained under a crisis situation, which provides meaningful insights about how firms can conduct knowledge management in their daily operations to deal better with corporate crises.

Corporate diversification and firm value: evidence from emerging markets

2015 ◽  
Vol 10 (3) ◽  
pp. 294-310 ◽  
Author(s):  
Elif Akben Selçuk
Keyword(s):  
Emerging Markets ◽  
Firm Value ◽  
Fixed Effects ◽  
Generalized Method Of Moments ◽  
Corporate Diversification ◽  
Fixed Effects Model ◽  
Developed Country ◽  
Content Type ◽  
Diversified Firms ◽  
The Impact

Purpose – The purpose of this paper is to investigate the impact of corporate diversification on firm value in a sample of nine emerging markets including Brazil, Chile, Indonesia, Malaysia, Philippines, Poland, South Africa, Thailand, and Turkey. For the purpose of this study, a company is classified as diversified when it is operating in two or more lines of business defined by the two-digit SIC codes. Design/methodology/approach – Employing panel data from 1,568 companies for the period 2005-2010, this paper estimates both a fixed effects model and a dynamic generalized method of moments model. Data are collected both at company level and segment level within each firm. Findings – Overall, analysis results suggest that, for the period from 2005 to 2010, diversified firms in emerging markets are valued more compared to single-segment firms operating in similar industries, providing support for diversification premium. Originality/value – The effect of diversification on company value in emerging markets is an important managerial and public policy concern. Although the literature on developed country diversified firms is rich, only a few studies have examined diversification-value relationship in the context of developing countries. Furthermore, most previous research on the value effects of corporate diversification in emerging markets has taken the form of case studies within countries and concentrated on the 1990s. This paper tries to fill these gaps by using a larger sample and more recent data and methodology.

Do corporate diversification and earnings management practices affect capital structure?

2015 ◽  
Vol 7 (4) ◽  
pp. 360-378 ◽  
Author(s):  
Ranjitha Ajay ◽  
R Madhumathi
Keyword(s):  
Capital Structure ◽  
Earnings Management ◽  
Management Practices ◽  
Negative Relationship ◽  
Corporate Diversification ◽  
Content Type ◽  
Diversification Strategies ◽  
Market Product ◽  
Diversified Firms ◽  
The Impact

Purpose – The purpose of this paper is to empirically examine the impact of earnings management on capital structure across firm diversification strategies. Design/methodology/approach – The study focuses on firms operating in the manufacturing sector (diversified and focused). Panel data methodology compares diversification strategies and identifies the impact of diversification strategy with earnings management practices on capital structure decision. Findings – International and product diversified firms have lower levels of leverage than focused firms in their capital structure. Asset-based earnings management is positive for diversified (market/product) firms. Earnings management using discretionary expenditure (project based) is found to be higher for market diversified but product-focused firms. Earning smoothing method is found to be significant for focused firms and shows a negative relationship with capital structure. Originality/value – This study offers an insight into the relationship between corporate diversification, earnings management and capital structure decisions of manufacturing firms. The results provide an important contribution to accounting and strategy literature. A distinction is made between market- and product-diversified firms and influence of earnings management practices (asset-based, project-based and earnings smoothing (ESM)) on capital structure decisions. Diversified firms (market/product) tend to have lower levels of leverage than focused firms and earnings management practices within firm groups significantly influence the capital structure decisions.

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.

Corporate Diversification and Firm Value in Financial Crisis in Vietnam

2017 ◽  
Vol 33 (4) ◽  
Author(s):  
Nguyen Kim Duc ◽  
Nguyen Thi Hong Nhung ◽  
Tran Vu Quynh Nhu
Keyword(s):  
Financial Crisis ◽  
Firm Value ◽  
Random Effect ◽  
Random Effect Model ◽  
Corporate Diversification ◽  
Effect Model ◽  
Panel Data Regression ◽  
Data Regression ◽  
Industrial Level ◽  
Diversified Firms

This research aims at assessing the relationship between corporate diversification and firm value ​​in the time of financial crisis in Vietnam. The research sample consists of 42 Vietnamese non-financial enterprises listed on HoSE from the first quarter of 2008 to the fourth quarter of 2011. We used two methods to estimate panel data regression: (1) Regression Method Pooled OLS and (2) Random Effect Model (REM). The results show that: (1) There is relationship between corporate diversification and firm value, however, corporate diversification should be implemented at either national or industrial level; (2) The financial crisis doesn’t dominanate this relationship and the implementation of diversification will contribute to improving the relative valuation of diversified firms in Vietnam regardless of financial crisis. This empirical result will help Vietnamese enterprises have a reference for considering and making decision related to corporate diversification.

Impact of corporate diversification on earnings management

2017 ◽  
Vol 9 (2) ◽  
pp. 82-106
Author(s):  
Muhammad Hammad Masud ◽  
Faisal Anees ◽  
Haseeb Ahmed
Keyword(s):  
Asymmetric Information ◽  
Earnings Management ◽  
Cash Flows ◽  
Corporate Diversification ◽  
Main Function ◽  
Least Squares Regression ◽  
Content Type ◽  
Comparison Test ◽  
Information Hypothesis ◽  
Diversified Firms

PurposeThe purpose of this research is to examine the effects of corporate diversification on earnings management. Design/methodology/approachBased on listed firms regarding non-financial sector of Pakistan, the study runs mean comparison test along with panel least squares regression analysis. FindingsThe results of the study suggested that locally diversified firms and combination of industrial and geographical diversified firms mitigate earnings management. In support of the earnings equalizing hypothesis, managers of diversified firms have less need for accruals management because diversified firms had more free cash flows which naturally reduces earnings variability. This study also found that diversified firms had no informational asymmetry problems which reject the asymmetric information hypothesis. In addition, debt ratios are also associated with large organizations, but it shows that the more debt ratios are negatively associated with earnings management. Mean comparison test is also conducted, but the results are same as the regression results which does not confirm asymmetric information hypothesis. Research limitations/implicationsDifferent business segments are affected by the world financial crisis in 2008. Because of those financial shocks, the diversified firms are affected more. In future studies, results will become more favorable in context of diversified firms. Practical/implicationsThe main function of earnings management is to make up the company for investors point of view to look healthier than it really is. But it may cause to disappointment for investors regarding loss of investment. It shows future projections of the company and has vital importance for investor’s perspective. Social/implicationsThe misallocation of resources caused by earnings management refers to the value loss for society. Because the misallocation of funds will make that particular segment or division more vulnerable which ultimately make shareholders to go for entrenchment or liquidation. At the end, un-employment rises after entrenchment or liquidation and the society suffers. Originality/valueThis research makes an important contribution to the accounting and management literature by providing new and significantly different evidences on the relative roles of corporate diversification and earnings management.

Cui bono? An empirical investigation into risk benefits of corporate diversification

2017 ◽  
Vol 16 (4) ◽  
pp. 429-450 ◽  
Author(s):  
Jonas P Haug ◽  
Ulrich Pidun ◽  
Dodo zu Knyphausen-Aufseß
Keyword(s):  
Systematic Risk ◽  
Indirect Costs ◽  
Corporate Diversification ◽  
Total Risk ◽  
Bankruptcy Risk ◽  
Firm Diversification ◽  
Unrelated Diversification ◽  
Synergy Effects ◽  
Diversified Firms ◽  
The Impact

While the diversification–performance link is well covered in strategy research, we know much less about the link between firm diversification and risk. This article draws from modern portfolio theory and corporate diversification theory to derive a comprehensive set of hypotheses on the impact of related and unrelated diversification on the systematic risk, total risk, and bankruptcy risk of a firm. Based on a large international sample, we find the portfolio effect to be more important than previously thought, while synergy effects appear to be largely counterbalanced by the direct and indirect costs of diversification. Specifically, we find that systematic risk is not reduced by corporate diversification, while bankruptcy risk is significantly lower in diversified firms, possibly leading to conflicts between shareholders and other stakeholder groups.

Corporate controls, geographic dispersion, and their effect on corporate financial performance in related diversified corporations

2017 ◽  
Vol 10 (1) ◽  
pp. 102-117 ◽  
Author(s):  
Pouya Seifzadeh
Keyword(s):  
Corporate Strategy ◽  
Corporate Diversification ◽  
Control Mechanisms ◽  
Geographic Diversification ◽  
Content Type ◽  
Geographic Dispersion ◽  
Positive Effects ◽  
Unrelated Diversification ◽  
Related Diversification ◽  
Overall Performance

Purpose Drawing on the literature on corporate diversification, the purpose of this paper is to shed light onto the influence of geographic dispersion on the effectiveness of control mechanisms in related diversified corporations. This research contends that control mechanisms implemented by corporations and the extent of geographic diversification play a role in the synergies expected from related diversification being realized. Design/methodology/approach This study uses OLS regression to analyze data collected through surveys from managers of 193 Iranian corporations and their 2,704 subsidiaries to examine the relationship between relatedness, corporate performance, geographic dispersion, and emphasis of strategic controls. Findings The author finds that a triple interaction effect between corporate strategy (diversification approach), controls mechanisms, and the extent of geographic diversification influences the overall performance of corporations. Findings of this research suggest that the positive effects of strategic controls in related diversified corporations are most when there is less geographic dispersion and will attenuate as corporations become more geographically disperse. Research limitations/implications The findings of this research, have contributed to the extant literature in several ways. First, the findings further establish the superiority of related diversification to unrelated diversification in achieving economic performance in corporations. The findings reveal that, ceteris paribus, the more relatedness between activities of subsidiaries in corporations exists, higher performance can be expected at the corporate level. Second, the findings show once more that to achieve the higher performance that results from synergies in related diversified corporations, emphasis of strategic controls play a crucial and important role. Third, the author find that although the emphasis of strategic controls in essential to realizing the potentials in related diversified corporations, greater geographic dispersion attenuates the positive effects expected from stricter enforcement of strategic control mechanisms. Practical implications An important consequence of findings of this research is that managers should be more aware of the implications of selecting the geographic location of the subsidiaries that they either acquire or establish. While the literature focusing on corporate diversification has mainly focused on the differences between related and unrelated diversification, this paper brings a new factor into light. Therefore, the findings of this research provide the author with a better understanding of the factors that define success or failure in achieving financial objectives of corporations. Originality/value There has been very little done to investigate the factors that influence effectiveness of strategic controls in related diversified corporation. Much of this shortcoming has resulted due to difficulties in measurement of strategic controls their operationalization in empirical studies. This study has taken a step to that direction and therefore, provides a more coherent and clear picture of the factors that influence the overall performance in corporations.

scholarly journals Corporate diversification and accrual and real earnings management

2018 ◽  
Vol 17 (2) ◽  
pp. 198-214 ◽  
Author(s):  
Mohammad Alhadab ◽  
Thang Nguyen
Keyword(s):  
Earnings Management ◽  
Linear Relationship ◽  
Real Earnings Management ◽  
Corporate Diversification ◽  
Publicly Traded ◽  
Content Type ◽  
Non Linear ◽  
The Usa ◽  
Diversified Firms ◽  
Reported Earnings

Purpose This study aims to examine the non-linear relationship between corporate diversification and real and accrual earnings management, using a sample of 5,659 US firm-year observations for 1,221 firms covering the period from 2001 to 2012. Design/methodology/approach The authors use various techniques and regressions to test the hypotheses. Following prior research, several proxies have been used to measure diversification, accrual earnings management and real earnings management. Findings The study produces several important findings. First, the study provides evidence that diversified firms engage in real and accrual earnings management to manage their reported earnings upward. These results are consistent with recent research (Farooqi et al., 2014; Jirapon et al., 2008) that finds that diversified firms engage in earnings manipulation. Second, and most importantly, the study contributes to the literature by providing the first evidence on a non-linear relationship between corporate diversification and earnings management. Specifically, the study provides evidence that diversified firms engage in accrual (real) earnings management, but this engagement is associated with level of diversification in a non-linear U-shaped (inverted U-shaped) relationship. Research limitations/implications Like all other studies, the current study has some limitations. The study was conducted only on the largest firms in the USA that have market capitalization of more than US$10m; hence, the findings may not be generalizable to small publicly traded firms. Further, the findings may not be generalizable to other markets, given the unique characteristics of US markets such as the presence of very sophisticated investors. Practical implications This study provides some important implications for US regulators to revise their regulations to prevent diversified firms from using earnings management to manipulate reported earnings. Originality/value This study is the first in the USA to examine the non-linear relationship between corporate diversification and earnings management. The study focuses on one of the most active, most attractive and largest capital markets throughout the world, that of the USA. Also, this study is one of the few studies that examine whether diversified firms use real activities manipulation to manage their reported earnings.

Corporate diversification and firm performance: an empirical investigation of causality

2018 ◽  
Vol 26 (2) ◽  
pp. 202-225 ◽  
Author(s):  
Aparna Bhatia ◽  
Anu Thakur
Keyword(s):  
Firm Performance ◽  
Causal Relationship ◽  
Simultaneous Equation ◽  
Equation Model ◽  
Product Diversification ◽  
Corporate Diversification ◽  
Content Type ◽  
And Performance ◽  
Diversified Firms ◽  
Index Measure

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.

Attitude of bank credit managers and analysts towards firm diversification in Mozambique

2017 ◽  
Vol 9 (3) ◽  
pp. 182-204
Author(s):  
Ibeawuchi Ibekwe
Keyword(s):  
Cash Flows ◽  
Bank Credit ◽  
Diversification Discount ◽  
Chi Square ◽  
Content Type ◽  
Corporate Managers ◽  
Firm Diversification ◽  
Unrelated Diversification ◽  
Chi Square Test ◽  
Diversified Firms

PurposeThe purpose of this paper is to survey bank credit managers and analysts in Mozambique regarding their attitude toward firm diversification. Design/methodology/approachForty-five credit managers and analysts from 23 banks in Mozambique were surveyed about their views on diversification and diversified firms. Questionnaires were used. Data were analyzed using chi-square test and binomial test. FindingsCredit analysts and managers in Mozambique have a generally positive attitude toward diversification. This is mainly due to the coinsurance effects and stability of cash flows that diversification could provide. They, however, prefer moderately diversified to highly diversified firms and related to unrelated diversified firms. This is a puzzle, given the expectation that greater unrelated diversification is better able to provide coinsurance. Practical implicationsThe study provides information that is useful for understanding the diversification–cost of capital relationship and could help corporate managers in making capital structure decisions. Originality/valuePrevious researchers have not studied the attitude of credit managers/analysts toward diversification in Mozambique using the survey approach. The study contributes to the literature on diversification and access to external finance, the diversification discount and cash holding behavior of firms.

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