Diversification vs Focus Flashcards
Lang and Stulz 1994 JPE
Tobin’s Q and firm diversification negatively related through 1980s. Moreover, diversified firms have lower Q than portfolio fo pure-play firms. Firms that diversify are poor performers relative to firms that don’t, but only weak evidence that poor performers have lower Qs than average firm in industry. Thus, low Q of diversified firms cannot be completely explained by poor performance prior to diversification.
Servaes1996 JF
Look at early days of diversificaiton and find no evidence that diversified firms valued at premium in 60s and 70s. In fact, a large diversification discount existed during 60s. Insiders apparently recognized this because inside ownership negatively related to diversification in 60s. But, when discount vanished in 70s firms with high inside ownership were the first to diversify.
Denis Denis and Sarin 1997 JF
Empirical study that finds that level of diversification in the 80s negatively related to managerial equity ownership, suggesting that agency problems cause value-reducing diversification. Also find that diversification is negatively related to level of outside blockholder ownership. This along with decreases in diversification being related to external control threats, indicates that trend towards focus in the 90s attributable to market disciplinary forces.
Schoar 2002 JF
Plant-level data shows that while conglomerates are more productive at a given point in time, diversifying firms experience a net reduction in productivey over time. Moreover, while productitivy increases at acquired plants, it reduces at incumbent plants. Stock prices track productivity for focused and diversified firms, thus opacity cannot explain discrepancy between productivy and stock prices for the latter. Findings suggest it may be rent dissipation via increased wages that explains discrepancy.
Tate and Yang 2011
Diversification may benefit a firm by the redeployability of generalist human capital. Furthermore, while diversified firms pay higher wages, because generalists have outside options, their labor is more productive.
