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2018 | Book

Introduction Read chapter Read first chapter

The Coinsurance Effect of Corporate Diversification

An Empirical Analysis of the Accounting and Economic Implications

Author: Dominik Nußmann

Publisher: Springer Fachmedien Wiesbaden

Book Series : Quantitatives Controlling

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

Dominik Nußmann comprehensively analyzes the coinsurance effect of corporate diversification by first providing a structured review of all relevant findings presented in the financial economics and accounting literature. Based on this review, he examines important accounting and economic implications of the coinsurance effect by means of two comprehensive empirical analyses. In particular, he finds that diversified firms benefit from coinsurance through financial as well as accounting synergies which entail considerable value-enhancing potentials.

Table of Contents

Frontmatter
Chapter 1. Introduction
Abstract
The effects of corporate diversification on firms’ market valuation have been subject of an extensive line of financial economics research for more than four decades. Core to this research has been the question whether corporate diversification creates or destroys firm value. The long-held belief that the potential costs of diversification outweigh the potential benefits is attributable to the empirical observation that diversified firms are, on average, valued less than comparable portfolios of focused firms (e.g., Lang and Stulz 1994; Berger and Ofek 1995).
Dominik Nußmann
Chapter 2. The Firm Characteristic of Corporate Diversification
Abstract
This chapter provides the basic knowledge for my subsequent examinations through a comprehensive discussion of the firm characteristic of corporate diversification. Section 2.1 presents the business strategy underlying the firms’ diversification decisions as well as the empirical measurement of corporate diversification. Section 2.2 introduces and structures the existing research literature on the various effects (benefits and costs) of corporate diversification. Section 2.3 discusses studies that empirically examine the valuation implications (premium vs. discount) of corporate diversification. Section 2.4 presents research studies that apply the concept of corporate diversification to related accounting research fields.
Dominik Nußmann
Chapter 3. Corporate Diversification and Earnings Quality
Abstract
The following chapter addresses the accounting implications of corporate diversification by examining the relationship between the coinsurance effect of diversification and earnings quality. In general, coinsurance arises through the combination of imperfectly correlated earnings (cash flows) within a diversified firm and can be beneficial through the reduction of bankruptcy risk (costs), financial constraints or even systematic risk (e.g., Lewellen 1971; Leland 2007; Duchin 2010; Hann et al. 2013). While prior studies find that more severe agency problems of diversified firms reduce the quality of accounting information, I provide an alternative approach to explain how coinsurance benefits affect a firm’s earnings quality.
Dominik Nußmann
Chapter 4. Implication for the Excess Value of Corporate Diversification
Abstract
This chapter covers the economic implications of corporate diversification. Specifically, I explore whether coinsurance benefits on earnings quality (operating volatility) affect the excess value of diversified firms through less accounting information risk.
Dominik Nußmann
Chapter 5. Concluding Remarks
Abstract
Throughout this thesis, I examine the two related research questions of whether coinsurance matters for a firm’s earnings quality and whether earnings quality can explain cross-sectional variation in the value of corporate diversification. I demonstrate the benefits of coinsurance for a firm’s earnings quality and how these benefits translate into a reduction of the diversification discount. Furthermore, I explore the potential sources of the coinsurance effect on earnings quality and whether investors assess the value of accounting information on an aggregated earnings level or if they differentiate between underlying sources that drive earnings quality (volatility).
Dominik Nußmann
Backmatter
Metadata
Title
The Coinsurance Effect of Corporate Diversification
Author
Dominik Nußmann
Copyright Year
2018
Electronic ISBN
978-3-658-19374-4
Print ISBN
978-3-658-19373-7
DOI
https://doi.org/10.1007/978-3-658-19374-4

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