آیا تخفیف تنوع از ارزش اسمی بدهی ناشی می شود؟

We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk. Thus, measures of firm value based on book values of debt undervalue diversified firms relative to focused firms. Our paper complements recent literature which uses market values to test the risk reduction hypothesis for a subsample of firms for which debt is traded. Alternatively, we employ market value of debt estimates for the whole firm universe. Consistent with the above hypothesis, we show that the use of book values of debt underestimates the value of diversified firms. There is no discount for mainly equity financed firms and lower distress risk and equity volatility for diversified firms. More concentrated ownership increases firm valuation.

The benefits and costs of corporate diversification have been the subject of extensive empirical and theoretical research.1Weston (1970) suggests that diversified firms have the ability to use economies of scale because they provide more efficient operations and more profitable lines of business when compared to stand-alone firms. Lewellen (1971) argues that diversified firms enjoy greater debt capacity and debt tax shields relative to single-line firms due to lower firm risk. Furthermore, diversification can create internal capital markets that enable firms to pool and reallocate corporate resources more efficiently through “winner picking” than through external financing, which may increase investment efficiency (see, e.g., Stein, 1997). The negative impacts of corporate diversification are often described in terms of inefficient investments due to cross-subsidization between divisions. Rajan et al. (2000), for example, model distortions caused by internal power struggles among the divisions of a diversified firm in the course of the resource allocation process. Other costs of diversification include investments in lines of businesses with poor investment opportunities (e.g., Stulz, 1990). Jensen (1986) argues that diversified firms invest more in negative cash flow projects than their segments would if operated independently. This argument is reinforced by the influence cost model of Meyer et al. (1992), in which lower-level managers of a firm attempt to lobby top management to increase the investment flows available to their business segment, even if the business segment has poor future growth prospects. Compared to focused firms, lobbying leads to inefficiencies in diversified organizations. Scharfstein and Stein (2000) suggest that rent-seeking behavior by divisional managers undermines the functioning of internal capital markets and leads to inefficient investments. Overall, the published literature on corporate diversification suggests that conglomeration is associated with greater agency costs. These agency costs are manifested in the form of accepting negative net present value projects, which reduce the value of a firm. The empirical literature mainly documents a so-called “diversification discount”. As developed by Lang and Stulz, 1994 and Berger and Ofek, 1995, the diversification discount compares the market value of a diversified firm to the imputed stand-alone values of its individual segments. These imputed values are based on multiples (such as price-to-book value or price-to-sales) of comparable pure-play firms in the same industry as the corresponding diversified firm’s segments. Using data from the US, these authors find substantial mean discounts on the order of 15%, which they interpret as evidence of value destruction of diversified firms. This work has been extended to a variety of other sample periods and countries by Servaes, 1996 and Lins and Servaes, 1999, or Lins and Servaes (2002). Results suggest that the diversification discount is a pervasive phenomenon. However, a number of other papers cast doubt on the interpretation that the diversification discount reflects value destruction. Campa and Kedia, 2002, Chevalier, 2004, Graham et al., 2002 and Villalonga, 2004 all argue in one way or another that the discount is driven by endogeneity bias, as relatively weak firms are the ones that choose to diversify in the first place. A balanced reading of these papers suggests that accounting for this endogeneity bias reduces – though does not eliminate – the discount. Overall, the diversification discount seems to be such a stable fact that consulting firms base their strategy suggestions on these findings. For example, the Boston Consulting Group (2006) writes how diversified firms can create value. Even textbooks pick up the arguments of the early literature and state that the diversification discount is likely to be the consequence of agency problems and inefficient resource allocation in conglomerates (see, e.g., Hill and Jones, 2007). Despite the vast amount of literature on the diversification discount one aspect of the Berger and Ofek (1995) excess value measure is hardly addressed: the risk effects of conglomeration and its subsequent impact on firm value. While diversification reduces shareholder value, it enhances bondholder value due to a reduction in firm risk. Mansi and Reeb (2002) is the only published study which makes this point. They obtain the market values of both debt and equity for a subset of US firms and examine the bias of using book values of debt to compute excess values. Consistent with the hypothesis that diversification leads to lower firm risk, they find that book values of debt are a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms. This finding suggests that measures of firm values based on book values of debt systematically undervalue diversified firms. When considering the joint impact of diversification on debt and equity holders, they find that, on average, corporate diversification is insignificantly related to excess firm value. Their conclusion is that diversification reduces shareholder value, increases bondholder value, and has no significant impact on total firm value. Given that several theoretical papers examine the consequences of corporate diversification by explicitly assuming that it leads to lower firm risk, it is surprising that Mansi and Reeb (2002) is the only published empirical study dealing with the risk effect of corporate diversification and its impact on firm value that we are aware of. For example, Lewellen (1971) argues that diversified companies enjoy higher debt capacities as their default risk is lower. As a consequence, the value of the company’s tax shield increases, which enhances the company’s overall value as well. Amihud and Lev (1981) argue that managers engage in corporate diversification, even if it reduces shareholder value, to reduce their human capital risk. The assumption is that corporate diversification lowers firm risk. In a contingent claims framework, lowering firm risk should lower shareholder value and increase bondholder value. Our analysis complements the study of Mansi and Reeb (2002). In principal, there are two ways to test the risk reduction hypothesis of corporate diversification. One way is suggested by Mansi and Reeb (2002). They use actual market values of debt which they obtain from the Lehman Brothers Fixed Income database and analyze the diversification discount for a subsample of firms for which debt is traded (13% of all US firms). Our study follows an alternative approach and tests the risk reduction hypothesis for the whole listed firm universe in a country (in our case a sample of all German non-financial CDAX firms from 2000 to 2006), which goes at the cost that market values of debt have to be estimated. This is due to the fact that even if one has access to a research database to infer the market price of debt, most corporate debt is not traded. This is especially true for bank-based systems like Germany. In this case one either has to use estimates of market values or to rely on book values. As a solution to this problem, we employ several specifications of the Merton (1974) bond pricing model which were previously used in different research contexts to estimate the market value of the firm’s assets. Our estimation procedure, which will be described in detail below, requires only very little additional information and can thus be implemented for almost all focused and diversified companies for which an excess value based on debt book values can be calculated. Eberhart (2005) shows that applications of the Merton (1974) model provide more accurate debt value estimates than the book value approximation. Our study is related to a recent working paper by Ammann et al. (2008) who treat the entire long-term debt on the books of firms as one coupon bond with the coupon set equal to the interest expenses on all debt. They then value this coupon bond at the current cost of debt for the company approximated by the yield of a bond portfolio with the same credit rating. As Compustat provides an official credit rating from S&P only for a very limited subset of their sample, they alternatively construct an artificial credit rating based on the interest coverage ratio. Their sample consists of all firms with data reported on both the Compustat Industrial Annual and Segment data files and covers the period from 1998 to 2005. Ammann et al. (2008) show with their approximation of the market value of debt that the potential effect of accounting for differences between the market and book value of debt on the conglomerate discount in the US is limited. Our main findings can be summarized as follows. In a first step, we document that German conglomerates trade at a significant discount of 15% when the traditional Berger and Ofek (1995) measure is used. Consistent with the risk reduction hypothesis and in line with Mansi and Reeb (2002), we provide evidence that the use of book values of corporate debt in the computation of the excess value underestimates the firm value of diversified firms when compared to focused ones. Additional tests are also consistent with the risk reduction hypothesis of corporate diversification (no discount for firms which are barely financed with debt, lower distress risk and lower equity volatility for diversified firms). Moreover, we show that ownership structure affects the diversification discount. We therefore conclude that the book value of debt bias is an important, but not the only explanation for the diversification discount. The remainder of the study is organized as follows. In Section 2, we describe the data set, the identification of focused and diversified firms, and the excess value measure. In Section 3, we outline the precise procedure of how we estimate market values of debt. Furthermore, we assess the quality of our estimation by comparing market value of debt estimates with actual bond prices for a subset of our initial firm sample. Section 4 presents the results and the last section concludes.

Prior literature documents that diversified firms trade at a discount relative to the sum of imputed values for their business segments. However, theoretical arguments suggest that corporate diversification has both a positive and a negative impact on value. Empirical research on the value impacts of corporate diversification suggests that firm value is decreasing in diversification. In this paper, we argue that there is actually much less evidence of a general loss of investor wealth associated with corporate diversification. Our major line of reasoning is that the excess value concept suggested by Berger and Ofek (1995) underestimates the firm value of diversified firms compared to focused ones. And since most later studies which analyze potential causes of the diversification discount follow the Berger and Ofek (1995) procedure, they may also contain a systematic measurement bias and overestimate the discount. One of the obvious consequences of corporate diversification (apart from any potentially increasing inefficiencies in the internal capital budgeting process) is that it should lead to lower firm risk if business units with cash flows which are not perfectly positively correlated are grouped together. In terms of the Merton (1974) model of debt valuation, lower firm risk (lower volatility of the firm’s asset value) will increase bondholder’s value at the expense of shareholder’s value. The argument is that the equity of a firm can be viewed as a call option on the firm’s assets because shareholders are the residual claimants on the firm’s assets after any obligations have been met. Thus, there is reason to believe that book values of corporate debt are a more downward biased measure of market values for diversified companies. The traditional Berger and Ofek (1995) excess value measure compares the firm value of a company computed as the market value of equity plus the book value of debt to its imputed value as if its segments operated as stand-alone firms. Book values of debt are used as a proxy for market values of debt because most corporate debt is not traded implying that market values are not observable. Under the assumption that book values are reasonably close to market values of debt and that any differences are not systematically related to the degree of corporate diversification this approach is not problematic. However, this is unlikely to be the case as we describe above. This argument was first put forward by Mansi and Reeb (2002), who compute the excess value for a subset of diversified firms using market values of debt. They find that there is no significant diversification discount if one relies on the market price of debt. While Mansi and Reeb (2002) use actual market prices of debt from about 13% of the original sample of US firms, we employ a different method to assess the magnitude of the bias in the excess value computation. We replace the book value of debt by market value of debt estimates that are based on the implementation of the Merton (1974) model suggested by Eberhart (2005). This procedure is possible for all firms in our sample. To summarize, Mansi and Reeb (2002) use the true measure of the value of debt (the actual market price) for a subsample of firms whereas our study uses estimates of the market values for the whole firm universe. As estimates may be noisy, we extensively address how noisy our estimates actually are. It turns out that they are quite precise. Furthermore, we stress that our way of testing the risk reduction hypothesis is better suited for bank-based countries like Germany for which bank credit is important and where market prices of debt barely exist. In line with Mansi and Reeb (2002), the diversification discount is reduced. Additional tests are also consistent with the risk reduction hypothesis of corporate diversification. Both the Mansi and Reeb (2002) and our study suggest that the risk reduction hypothesis plays an important role in explaining the size of the discount in studies using the traditional Berger and Ofek (1995) excess value measure. Our results differ from those of Mansi and Reeb (2002) because there remains a small but statistically significant discount in our firm sample. We cannot rule out the possibility that this small difference is driven by the fact that our market value estimates are measured with error. Note, that we are only able to show that our estimation procedure works quite well for firms which have bonds outstanding. Given that we also show that ownership structure affects the diversification discount, we conclude that the book value of debt bias is unlikely to be the sole explanation for the diversification discount. Future research should therefore analyze which economic factors additionally drive the diversification discount. Recently proposed factors are managerial optimism, managerial power, corporate governance, or efficiency of internal capital allocation.