Diversification: Value-Creating or Value-Destroying Strategy? Evidence from Using Panel Data

Antonio Galv n, Julio Pindado and Chabela de la Torre (chabela@usal.es)
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Antonio Galv n: Universidad Aut¢noma de Tamaulipas
Chabela de la Torre: Departamento de Administraci¢n y Econom¡a de la Empresa, Facultad de Econom¡a y Empresa, Universidad de Salamanca, http://web.usal.es/~chabela/

No 2007-04, Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". from Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Doctorado Interuniversitarios (con mención de calidad de la ANECA) en "Economía de la Empresa", Universidades de Valladolid, Burgos, Salamanca y León (España). Hasta 2008, Programa de Doctorado Interuniversitario (con mención de calidad de la ANECA) “Nuevas Tendencias en Dirección de Empresas”, Universidades de Valladolid, Burgos y Salamanca (España).

Abstract: This paper provides evidence on how the diversification strategy impact on the firm value. Furthermore the paper studies the effect of the levels and types of diversification on the firm value. To achieve this aim, we propose a value model that incorporates the level and type of diversification. The estimation of the model by using the Generalized Method of Moments provides interesting results. Consistent with the value-destroying expectations, we find a reduction in the value of the diversified companies in the eurozone countries, however there is a non linear relationship between the diversification and value, giving rise to an optimal level of diversification. Moreover our results support that related diversification is more value-creating than non-related diversification. Additionally we test the effect of diversification of market valuation by focusing on the discount that diversified firms trade at, then a value destroying is achieved for the diversified companies in our sample, and we also have evidence on the hypothesis that relatedness moderates the value loss from diversification.

Keywords: Corporate diversification; relatedness; firm value; excess value (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-06
New Economics Papers: this item is included in nep-bec and nep-cfn
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More papers in Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". from Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Doctorado Interuniversitarios (con mención de calidad de la ANECA) en "Economía de la Empresa", Universidades de Valladolid, Burgos, Salamanca y León (España). Hasta 2008, Programa de Doctorado Interuniversitario (con mención de calidad de la ANECA) “Nuevas Tendencias en Dirección de Empresas”, Universidades de Valladolid, Burgos y Salamanca (España). Contact information at EDIRC.
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