Diversification, Productivity, and Financial Constraints Empirical Evidence from the US Electric Utility Industry

Mika Goto, Angie Low and Anil K. Makhija
Additional contact information
Mika Goto: Central Research Institute of Electric Power Industry
Angie Low: Nanyang Technological U
Anil K. Makhija: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We examine the real effects of parent firm diversification on their electric utility operating companies over the period, 1990-2003. Since electric utility operating companies produce a single homogenous product, we can better measure their Total Factor Productivity and make valid comparisons of productivity across firms. We find that, consistent with a diversification discount, greater parent diversification is associated with lower productivity across electric utility operating companies. However, the productivity of the electric utility operating companies improves with greater parent diversification over time. Diversification appears to provide an alternative channel to divert investment dollars away from overinvestment in the core electric business. Finally, we find that the improvement in the productivity of the electric utility operating companies from greater parent firm diversification over time is limited to financially constrained firms. This suggests that when managers have no resources to waste, it is more likely that any diversification activities are carefully planned and undertaken for strategic purposes that can help to increase productivity of the core business.

JEL-codes: L25 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-bec, nep-eff and nep-ind
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Citations: View citations in EconPapers (1)

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