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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|14607||2010||22 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 96, Issue 3, June 2010, Pages 463–484
The diversification discount (multiple segment firm value below the value imputed using single segment firm multiples) is commonly thought to be generated by agency problems, a lack of transparency, or lackluster future prospects for diversified firms. If multiple segment firms have lower uncertainty about mean profitability than single segment firms, rational learning about mean profitability provides an alternative explanation for the diversification discount that does not rely on suboptimal managerial decisions or a poor firm outlook. Empirical tests which examine changes in firm value across the business cycle and idiosyncratic volatility are consistent with lower uncertainty about mean profitability for multiple segment firms.
Traditional explanations for the diversification discount (multiple segment firm value is less than the imputed value using single segment firm multiples) rely on agency problems, a lack of transparency, or lackluster future prospects for diversified firms. Rational learning about future average long-term profitability provides an alternative explanation for the diversification discount that does not rely on suboptimal managerial decisions or a poor firm outlook. If diversified firms have less uncertainty about future mean profitability, we predict the following: (1) In the cross-section, diversified firms will trade at a discount relative to single segment firms due to convexity of the discounting function. (2) As firms age, the sales or assets multiples of single segment firms will drop more than the sales or assets multiples of diversified firms as more uncertainty about mean profitability will be resolved for single segment firms than for diversified firms. (3) The difference in the value change across time for single segment and diversified firms will be larger during economic booms (when the equity risk premium is low) and smaller during economic recessions (when the equity risk premium is high). (4) After controlling for volatility in profitability, diversified firms will have lower idiosyncratic return volatility than single segment firms due to the idiosyncratic nature of learning. We confirm these predictions in a sample comparable to the previous literature (1978–1997) and in an expanded sample from 1978 to 2005. Though more agency problems, more asymmetric information, and weaker future prospects for diversified firms generate a predicted diversification discount, these explanations do not generate the same dynamic or volatility predictions as the rational learning model. The empirical findings are consistent with rational learning and lower uncertainty about mean profitability for diversified firms as an explanation for the diversification discount. In the rational learning model developed by Pástor and Veronesi (2003) mature firms have lower uncertainty about average profitability which leads to lower cross-sectional market-to-book ratios, but not higher returns due to the idiosyncratic nature of the learning.1 As investors rationally learn about average profitability, the market value of the firm converges to its book value and market-to-book ratios change through time at a slower rate for mature firms. Mature firms also have lower idiosyncratic return volatility after controlling for the volatility of profitability which is consistent with lower uncertainty about average profitability and the idiosyncratic nature of learning. Using the intuition from Pástor and Veronesi (2003), we empirically examine whether lower uncertainty about average profitability for diversified firms is an explanation for the diversification discount. First, we confirm the diversification discount (a negative excess value for multiple segment firms) in our sample. As in Berger and Ofek (1995), we measure firm excess value as a log ratio of firm total capital to an imputed firm value. The imputed firm value is calculated using the median sales or assets multiple for the single segment firms in each segment.2 In our sample diversified firms have an average excess value of negative 9.7%, which is similar in magnitude to the diversification discount reported in the literature. Second, we examine the change in firm excess value over time. If diversified firms have less uncertainty about mean profitability, the drop in excess value should be larger for single segment firms than for diversified firms due to a larger resolution of growth rate uncertainty for single segment firms. Consistent with these predictions, the annual change in excess value is 3% lower for single segment firms (7% lower after controlling for endogeneity via instrumental variables).3 Our finding of a larger drop in excess value for single segment firms remains after removing firms that enter or exit the sample, addressing the wealth transfer effects between stockholders and bondholders noted in Mansi and Reeb (2002), and using a much broader sample (from 1978 to 2005) than is used in previous literature. The broader sample includes data after the release of Statement of Financial Accounting Standards (SFAS) 131 defined in Financial Accounting Standards Board (1997), a new segment reporting standard designed to increase transparency. Third, we show that the difference in changes in excess value across diversified and single segment firms co-varies with the business cycle in a predictable manner. When the equity risk premium is high future cash flows are discounted at a higher rate, and the discrepancy in uncertainty about mean profitability between multiple segment and single segment firms will have its least effect. On the other hand, when the equity risk premium is low the discrepancy will have its greatest effect. An empirical implication of this effect is that differences in the change in excess value of diversified and single segment firms will be greater during business cycle booms and lesser during contractions. In support, we show that single segment firms have a change in excess value that is 5.6% lower than diversified firms in years not surrounding recessions, but this difference is indistinguishable from zero in the period directly prior to a recession. We report a similar finding using shifts in the aggregate dividend payout ratio as a proxy for shifts in the equity risk premium. The final prediction of the rational learning model is that stocks with lower uncertainty about average profitability will have lower idiosyncratic return volatility after controlling for volatility in profitability. In support, we find that diversified firms have lower idiosyncratic return volatility than single segment firms. In the literature, the diversification discount has been ascribed to many factors. Among the most prominent of these explanations is that agency problems exacerbated by the diversified organizational form result in inefficient internal capital markets which cross-subsidize projects with lower cash flows and/or higher risks than those of their more focused competitors.4 Other prominent explanations are that agency problems cause overinvestment due to access to additional capital as in Jensen, 1986 and Jensen, 1988, or there may be a lack of transparency due to diversified firm structure as discussed in Krishnaswami and Subramaniam (1999). We show that an assumption of constant asset returns (including as the simplest case, the constant dividend growth model) will generate zero changes in excess value if agency problems or asymmetric information are the cause of the diversification discount. Moreover, these traditional explanations do not generate the observed business cycle behavior we find or the observed differences in idiosyncratic return volatility. More recent additions to the literature question value destruction by the diversified corporate form and argue that the diversification discount is endogenous. These papers suggest that firms with poor prospects are more likely to diversify or to be acquired.5 However, these models do not generate the dynamic empirical behavior that we show either. Unless the choice of firm projects is unanticipated and yet, on average in the same direction, these explanations will lead to zero changes in excess values over time. Since the existing explanations for the diversification discount generate static predictions about cross-sectional results, most of the empirical research to date has focused on a static comparison of firm excess values at a particular point in time or has examined changes in firm values surrounding changes in organizational form.6 We extend prior research with a comparison of the dynamic performance of diversified and single segment firms over time. An examination of the change in excess value of diversified and single segment firms in general, and across the business cycle, allows us to cleanly differentiate existing explanations for the diversification discount from a rational learning explanation. A notable distinction of the rational learning paradigm is that it does not rely on the suboptimal performance of managers or on a lackluster outlook for diversified firms. Diversification is neither good nor bad if diversified firms have lower uncertainty about mean profitability. Single segment firms have a higher excess value initially, but they experience a larger drop in excess value over time. The discount may, in fact, just reflect the convexity of the discounting function and differences in uncertainty about average profitability across diversified and focused firms. The remainder of the paper is organized as follows. Section 2 discusses in more detail the implications of various explanations for the diversification discount on the predicted changes in excess value. Section 3 outlines the data and methodology used to construct the measures we use in our empirical tests. Section 4 discusses the main results of the paper generated under the base specification of the model. Section 5 contains robustness checks to address the endogeneity of diversification, entering and exiting firms, wealth transfer effects, and the effects of SFAS 131 and pseudo-conglomeration. Section 6 concludes.
نتیجه گیری انگلیسی
The discussion about the value effects of diversification is ultimately a discussion on the optimal boundaries of the firm. As such, whether or not diversification creates or destroys value has been the subject of a vast amount of research, most of which has concentrated on identifying and explaining cross-sectional differences between focused and diversified firms. Within this setting it is extraordinarily difficult to differentiate between explanations for the identified value effects, the diversification discount, due to endogeneity both in the decision to diversify and in systematic differences between the types of firms. Our focus is to differentiate traditional explanations for the discount (which do not predict a difference in changes in excess value for diversified and focused firms) from the Pástor and Veronesi (2003) rational learning model. In contrast to previous research, we examine changes in excess value conditioned on firm organizational form and how these changes vary across the business cycle. We also examine idiosyncratic return volatility. If diversified firms have lower uncertainty regarding average profitability, the Pástor and Veronesi (2003) model can generate a diversification discount, a smaller drop in excess value for diversified firms over time, dynamic movements of excess value across the business cycle, and lower idiosyncratic return volatility for diversified firms. We support all of these predictions in our tests. In addition, we find that diversified firms are older and have lower volatility in profitability which is consistent with lower uncertainty and faster learning about average profitability for diversified firms. While inefficient cross-subsidization of low-quality projects can explain the diversification discount, it cannot account for a smaller drop in subsequent changes in excess value for diversified firms, or the dynamic movement of excess values across the business cycle, or the idiosyncratic return volatility results. Expanding the discussion of the well-documented diversification discount to include additional tests sheds new light on the source of the diversification discount. Lower uncertainty about the growth rate of diversified firms must also be considered as a plausible explanation for at least part of the discount. Traditional explanations for the diversification discount suggest there is suboptimal performance by diversified firm managers, or that diversified firms have a poor outlook. Diversification is neither good nor bad if the diversification discount is due to lower uncertainty about average profitability. Diversified firms have a lower excess value initially, but have a smaller drop in subsequent changes in firm value than focused firms. Furthermore, this model assumes rational behavior on the part of both managers and investors. Volatility in operating profitability (which slows down learning) and firm age may not capture all of the differences in uncertainty across diversified and focused firms in our sample. If differences in uncertainty are the sole source of the diversification discount and we could perfectly measure uncertainty, we should not observe differences in firm excess value, subsequent changes in excess value, or idiosyncratic return volatility between diversified and focused firms after controlling for differences in uncertainty. Firms may tend to acquire firms with low uncertainty about mean profitability when they diversify and tend to divest segments with low uncertainty about mean profitability when they focus. This will cause a drop in firm excess value when a firm diversifies, higher subsequent changes in firm excess value for diversified firms, and lower idiosyncratic return volatility for diversified firms. Provided our instruments for diversification are valid, our IV tests suggest that it is something about organizational form itself (rather than an unobservable correlated with diversification status) that results in differences in uncertainty in mean profitability across diversified and focused firms. A likely cause is some type of cross-division effect. However, we leave further exploration of a cross-division effect to future research.