Advertisement

Journal of Asset Management

, Volume 20, Issue 1, pp 31–37 | Cite as

Corporate diversification and abnormal returns

  • Chris M. LawreyEmail author
  • Brandon C. L. Morris
Original Article

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.

Keywords

Corporate finance Diversification Abnormal returns 

JEL Classification

G10 G11 G12 

References

  1. Amihud, Yakov. 2002. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets 5: 31–56.CrossRefGoogle Scholar
  2. Berger, Philip G., and Eli Ofek. 1995. Diversification’s effect on firm value. Journal of Financial Economics 37: 39–65.CrossRefGoogle Scholar
  3. Berger, Philip G., and Eli Ofek. 1999. Causes and effects of corporate refocusing programs. The Review of Financial Studies 12: 311–345.CrossRefGoogle Scholar
  4. Billett, Matthew T., and David C. Mauer. 2000. Diversification and the value of internal capital markets: The case of tracking stock. Journal of Banking & Finance 24: 1457–1490.CrossRefGoogle Scholar
  5. Bradley, Michael, Anand Desai, and E. Han Kim. 1988. Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms. Journal of Financial Economics 21: 3–40.CrossRefGoogle Scholar
  6. Chang, Yuk Ying, Sudipto Dasgupta, and Gilles Hilary. 2010. Ceo ability, pay, and firm performance. Management Science 56: 1633–1652.CrossRefGoogle Scholar
  7. Desai, Hemang, and Prem C. Jain. 1999. Firm performance and focus: Long-run stock market performance following spinoffs. Journal of Financial Economics 54: 75–101.CrossRefGoogle Scholar
  8. Dong, Ming, Igor Loncarski, Jenke ter Horst, and Chris Veld. 2012. What drives security issuance decisions: Market timing, pecking order, or both? Financial Management 41: 637–663.CrossRefGoogle Scholar
  9. Farber, David B. 2005. Restoring trust after fraud: Does corporate governance matter? Accounting Review 80: 539–561.CrossRefGoogle Scholar
  10. Hyland, David C., and J.David Diltz. 2002. Why firms diversify: An empirical examination. Financial Management 31: 51–81.CrossRefGoogle Scholar
  11. Jensen, Michael, and Richard Ruback. 1983. The market for corporate control* 1: The scientific evidence. Journal of Financial Economics 11: 5.CrossRefGoogle Scholar
  12. Kruse, Timothy A., Hun Y. Park, Kwangwoo Park, and Kazunori Suzuki. 2007. Long-term performance following mergers of Japanese companies: The effect of diversification and affiliation. Pacific-Basin Finance Journal 15: 154–172.CrossRefGoogle Scholar
  13. Lang, Larry H.P., and René M. Stulz. 1994. Tobin’s q, corporate diversification, and firm performance. Journal of Political Economy 102: 1248.CrossRefGoogle Scholar
  14. Liebenberg, Andre P., and David W. Sommer. 2008. Effects of corporate diversification: Evidence from the property–liability insurance industry. Journal of Risk & Insurance 75: 893–919.CrossRefGoogle Scholar
  15. Lins, Karl, and Henri Servaes. 1999. International evidence on the value of corporate diversification. The Journal of Finance 54: 2215–2239.CrossRefGoogle Scholar
  16. Lu, Jane W., and Paul W. Beamish. 2004. International diversification and firm performance: The s-curve hypothesis. Academy of Management Journal 47: 598–609.Google Scholar
  17. Minnick, Kristina, Haluk Unal, and Liu Yang. 2011. Pay for performance? Ceo compensation and acquirer returns in bhcs. The Review of Financial Studies 24: 439–472.CrossRefGoogle Scholar
  18. Santalo, Juan, and Manuel Becerra. 2008. Competition from specialized firms and the diversification-performance linkage. The Journal of Finance 63: 851–883.CrossRefGoogle Scholar
  19. Servaes, Henri. 1996. The value of diversification during the conglomerate merger wave. Journal of Finance 51: 1201–1225.CrossRefGoogle Scholar

Copyright information

© Springer Nature Limited 2018

Authors and Affiliations

  1. 1.Department of Economics and Finance, Mitchell College of BusinessUniversity of South AlabamaMobileUSA
  2. 2.Department of Finance and Financial ServicesWright State UniversityDaytonUSA

Personalised recommendations