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Erschienen in: Review of Quantitative Finance and Accounting 1/2017

02.07.2016 | Original Research

Is there an optimally diversified conglomerate? Gleaning answers from capital markets

verfasst von: Ali Nejadmalayeri, Subramanian Rama Iyer, Manohar Singh

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2017

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Abstract

Motivated by recent productivity-based theories of diversification, we argue that only conglomerates with an optimal degree of diversification can utilize their comparative advantages across various industries and achieve economies of scope by eliminating redundancies. Evidence from both corporate bond and equity markets suggests that optimally diversified conglomerates consist of either (1) approximately five equally weighted divisions, or (2) one large core business segment that roughly accounts for 75 % sales. Moreover, the relative size of divisions has a critical impact on how diversification affects credit spreads and excess values. Nonparity among divisions correlates with greater costs that increase with the number of divisions.

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Fußnoten
1
In the October 8, 2012 issue, the Wall Street Journal reports that “…American Express Co. and Wal-Mart Stores Inc. rolled out a prepaid card aimed at tens of millions of middle-class and lower income Americans eager to avoid fees charged by banks.” The article goes on to highlight that “…Wal-Mart has pushed aggressively into financial services despite failed attempts to obtain a U.S. bank charter that would allow the company to lend money and offer deposits backed by the Federal Deposit Insurance Corp.”.
 
2
Extant studies (Jiraporn et al. 2006; Berger and Ofek 1995; Bodnar et al. 1999) measure the diversification discount via “excess value,” which is defined as the ratio of a firm’s market capitalization to the imputed value of its market capitalization.
 
3
Although other more sophisticated methods can be used to find the fitted Treasury yield curve, Elton et al. (2001) note that these different proxies yield qualitatively similar results. As a result, we use simple interpolated fitted Treasury yields for the analysis pursued in the paper.
 
4
Other recent studies by, for example Elton et al. (2001), Eom et al. (2004), Gebhardt et al. (2005) and Güntay and Hackbarth (2010), also rely on the Fixed Income Database.
 
5
The exponential of the coefficient value is the ratio of market value of equity of the firm to the imputed value. For example, exp(−3.241) = 3.9 % translates to a discount of 96 % of the imputed value.
 
Literatur
Zurück zum Zitat Bodnar G, Tang C, Weintrop EJ (1999) Both sides of corporate diversification: the value impacts of geographical and industrial diversification. Working Paper. Wharton School of Business Bodnar G, Tang C, Weintrop EJ (1999) Both sides of corporate diversification: the value impacts of geographical and industrial diversification. Working Paper. Wharton School of Business
Zurück zum Zitat Cyriac J, Koller T, Thomsen J (2012) Testing the limits of diversification. McKinsey Quarterly, 2–5. Cyriac J, Koller T, Thomsen J (2012) Testing the limits of diversification. McKinsey Quarterly, 2–5.
Zurück zum Zitat Schoar A (2002) Effects of corporate diversification on productivity. J Finance 57:2379–2403CrossRef Schoar A (2002) Effects of corporate diversification on productivity. J Finance 57:2379–2403CrossRef
Metadaten
Titel
Is there an optimally diversified conglomerate? Gleaning answers from capital markets
verfasst von
Ali Nejadmalayeri
Subramanian Rama Iyer
Manohar Singh
Publikationsdatum
02.07.2016
Verlag
Springer US
Erschienen in
Review of Quantitative Finance and Accounting / Ausgabe 1/2017
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-016-0585-x

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