Article - Stowe and Xing (Topic 8)

Question 1

What does the paper by Stowe and Xing investigate?

Answer 1

the possibility the observed diversification discount is due to the difference in growth opportunities between diversified firm segments and single- segment firms

Question 2

how did they conduct their investigation?

Answer 2

by comparing diversified business segments
to individual single-segment and same- industry firms
with comparable growth opportunities

Question 3

how many of the sample single segment firms became diversified multi-segment firms during 1981-97? what other observations were made of this group?

Answer 3

230

pre- and post-diversification observation

Question 4

What were the main findings? (3)

Answer 4

• Diversifying firms on average have fewer growth opportunities than single-segment firms – the growth difference occurs before firms diversify (not due to diversification)
• After firms diversify, their growth opportunities are still less than those of single-segment firms
• Diversification itself makes insignificant difference to growth opportunities

Question 5

how much lower is the value of a diversified firm than that of a single segment firm?

Answer 5

median market value 9.7% below benchmark single– segment firms

Question 6

after diversifying do firms trade at a discount?

Answer 6

post-diversification diversifying firms do not trade at a discount, BUT median excess value after diversifying is 7.1% (much lower than before)

Question 7

which type of firms tend to diversify?

Answer 7

Firms with low growth opportunities tend to diversify, but it doesn’t explain all of the diversification discount.

Question 8

what was the conclusion of the study?

Answer 8

Results suggest that diversifying firms do have lower growth opportunities, but these growth differences are unlikely the primary cause of the diversification discount

however diversification does cause lower firm value, for reasons unknown

Question 9

what is the diversification discount percentage?

Answer 9

7% lower value

Question 10

is the imputed value or actual value larger for diversified firms?

Answer 10

imputed value

Question 11

how are imputed values for diversified firm segments determined?

Answer 11

by referencing them to capital values of single segment firms operating in the same industry and with similar g opps

Question 12

what was used as the actual value?

what was used as the imputed value?

Answer 12

• actual value is the sum of the market value of equity and the book value of debt
• the imputed value is the sum of its imputed segment values