Both Sides of Corporate Diversification: The Value Impacts of Geographic and Industrial Diversification

Gordon M. Bodnar · Charles Ya B. Tang · Joseph B. Weintrop

144 citations0/0 files storedNational Bureau of Economic Research

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Corporate Finance and Governance International Business and FDI Financial Reporting and Valuation Research

Abstract

This paper examines the effect of geographic and industrial diversification on firm value for a sample of over 20,000 firm-year observations of U.S. corporations from 1987-1993. Our multivariate tests indicate the average value of a firm with international operations is 2.2% higher than comparable domestic single activity firms, while the average value of a firm with activities in multiple industrial segments is 5.4% lower than a portfolio of comparable focused domestic firms in similar activities. More importantly, we demonstrate that failure to control simultaneously for both dimensions of diversification results in over-estimation of the negative value impact of industrial diversification, but has little impact on estimates of the positive value impact of geographic diversification.

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References

2009The International Operations of National Firms: A Study of Direct Foreign Investment 1991Why Investors Value Multinationality 1993Tobin's Q, Corporate Diversification and Firm Performance 1989Do Managerial Objectives Drive Bad Acquisitions?

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