Relation between Corporate Diversification and Firm Value

Document Type : Review Paper

Authors

1 Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran

2 Ph.D. student of Alzahra University

Abstract

Considering the increasing global competition and complex global environment,in order to use benefits of synergy, firm diversify their business. During the 1950s and 1960s many corporations hoping to achieve benefits of diversification attempts to diversify their business. Theories that developed by the late 1970s ,generally considered diversification as a beneficial strategy, while some studies after this period, referring to the costs of this action, mainly considered diversification as an activity which led to the depreciation of firm value. This view doesn’t last for a long time and subsequent studies showed that corporate diversification alone does not drive the discount or premium, rather the effect on value differs from firm to firm and is heterogeneous across certain industry settings, economic conditions and governance structures. So absolute attitude to this strategy does not seem correct .In general the effectiveness of this strategy depends on whether the benefits of diversification exceeds the costs of the action or not .In this study it will be tried to review previous studies about corporate diversification and firm’s incentives of diversification and further more the impact of this action on firm value will be examined.

Keywords

Main Subjects

References

Aggarwal، Rajesh. K.، Samwick، Andrew. A. (2003). Why do managers diversify their firms? Agency reconsidered. Journal of Finance، 71-118. ‏
Babaei Zakliki, Mohammad Ali, Hedayati, Shohreh. (2005). Exploring synergy management of holdings. Journal of Management message, NO (17) , 133-158. (in Persian).
Babaei Zakliki, Mohammad Ali. (2004). Study of the properties and performance of the holding companies in Iran. Second International Conference on Management. (in Persian).
Berger، Philip. G.، Ofek، Eli. (1995). Diversification's effect on firm value. Journal of financial economics، 37 (1)، 39-65. ‏
Chen، Sheng-syan.، Ho، Kim Way. (2000). Corporate diversification، ownership structure، and firm value: The Singapore evidence. International Review of Financial Analysis، 9 (3)، 315-326. ‏
Dimitrov، Valentin.، Tice، Sheri. (2006). Corporate diversification and credit constraints: Real effects across the business cycle. Review of Financial Studies، 19 (4)، 1465-1498. ‏
‏Erdorf، Stefan.، Hartmann-Wendels، Thomas.، Heinrichs، Nicolas.، Matz، Michael. (2013). Corporate diversification and firm value: a survey of recent literature. Financial Markets and Portfolio Management، 27 (2)، 187-215.
Ghosh، Aloke.، Jain، Prem. C. (2000). Financial leverage changes associated with corporate mergers. Journal of Corporate Finance، 6 (4)، 377-402. ‏
‏Khodamoradi، Saeed.، NazemBokaee.، Jalilian، Jamal. (2012). Relationships between corporate diversification with economic performance variables (EVA، REVA). Archives Des Sciences، 65 (6).
Kuppuswamy، Venkat.، Villalonga، Belen. (2007). Does diversification create value in the presence of external financing constraints? Evidence from the 2007–2009 financial crisis. Working paper، Harvard business school. ‏
Lang، Larry. H.، Stulz، Rene. M. (1993). Tobin's q، corporate diversification and firm performance (No. w4376). National Bureau of Economic Research. ‏
Lewellen، Wilbur. G. (1971). A pure financial rationale for the conglomerate merger. Journal of Finance، 26 (2)، 521-537. ‏
Rumelt، Richard. P. (1982). Diversification strategy and profitability. Strategic management journal، 3 (4)، 359-369. ‏
‏Santalo، Juan.، Becerra، Manuel. (2008). Competition from specialized firms and the diversification–performance linkage. The Journal of Finance، 63 (2)، 851-883. ‏
Stulz، Rene. (1990). Managerial discretion and optimal financing policies. Journal of financial Economics، 26 (1)، 3-27. ‏
Tehrani Reza, Babaei Zakliki ,Mohammad Ali and Karimi Kiyana. (2008). The impact of diversification strategy on financial performance of Tehran Stock Exchange listed firms, Financial research , NO (25) , 21-40. (in Persian).
Tehrani Reza, Vahed Ahmadian Hadi. (2006). The survey of the relationship between product diversification and stock return of … firms listed in Tehran Stock Exchange, journal of commerce, NO (38) , 187-212. (in Persian).
Volkov، Nikanor.، Smith، Garret C. (2015). Corporate diversification and firm value during economic downturns. The Quarterly Review of Economics and Finance، NO (55)، 160-175.
Yan، An.، Yang، Zaihui.، Jiao، Jie. (2010). Conglomerate investment under various capital market conditions. Journal of Banking & Finance، 34 (1)، 103-115
Journal of Accounting and Social Interests
Volume 7, Issue 2 - Serial Number 25
September 2017
Pages 19-34

Files

History

  • Receive Date: 21 April 2016
  • Revise Date: 18 June 2017
  • Accept Date: 30 May 2016

Share

How to cite

Statistics