Abstract
We examine the effect of corporate diversification by comparing abnormal returns between portfolios of diversified firms and focused firms. Our study covers US firms for the years 1976–2009 and compares abnormal returns over 12, 24, and 36-month windows. Initial univariate tests show mixed results, though after we control for firm, industry, and time effects, we find convincing evidence that diversified-firm portfolios outperform focused-firm portfolios over the 3-year term. Our findings indicate that the benefits of corporate diversification are captured over longer investing horizons.
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Notes
Fama and French have grouped several firm industries by four-digit SIC code. The groupings range from a five-industry set, up to a 49 industry set. Berger and Ofek (1995) and Santalo and Becerra (2008) use a two-digit SIC industry indicator, classifying up to 100 different industries. The Fama and French industries have a distinct advantage over the narrower two-digit industry class, as the number of firms per industry does not allow for a few firms to dominate the industry return. Moreover, both Berger and Santalo eliminate industries that have fewer than five single-segment firms.
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Lawrey, C.M., Morris, B.C.L. Corporate diversification and abnormal returns. J Asset Manag 20, 31–37 (2019). https://doi.org/10.1057/s41260-018-0100-0
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DOI: https://doi.org/10.1057/s41260-018-0100-0