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Firm value and the diversification choice: international evidence from global and industrial diversification

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  • Stephen Ferris
  • Nilanjan Sen
  • Nguyen Thi Anh Thu

Abstract

Our study examines the nature of industrial and global diversification for a sample of more than 12 000 firms across 35 emerging and developed countries during the period 1991-2006. Consistent with previous studies, we find that industrial diversification, either alone or combined with global diversification, results in a reduction of firm excess value. Global diversification alone, however, does not exert a significant impact on excess value. In an analysis of the decision to diversify, we find that firms in civil law countries or less developed nations are more likely to diversify, suggesting the greater utility of internal capital markets in economies where it is difficult to raise external capital. We observe that high leverage, larger size, lower levels of growth, R&D, free cash flow, profitability and Tobin's q encourage firms to diversify industrially. Higher values of q, firm size, R&D expenditures, free cash flow and liquidity, but reduced growth rates and profitability are associated with global diversification.

Suggested Citation

  • Stephen Ferris & Nilanjan Sen & Nguyen Thi Anh Thu, 2010. "Firm value and the diversification choice: international evidence from global and industrial diversification," Applied Economics Letters, Taylor & Francis Journals, vol. 17(11), pages 1027-1031.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:11:p:1027-1031
    DOI: 10.1080/00036840902817433
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    References listed on IDEAS

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    1. Stein, Jeremy C, 1997. "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
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    2. Larry Su & Elmina Homapour & Fabio Caraffini & Francisco Chiclana, 2022. "An Empirical Investigation of Multinationality and Stock Price Crash Risk for MNCs in China," Mathematics, MDPI, vol. 10(19), pages 1-12, September.
    3. Ireneusz Janiuk, 2017. "Mergers and Acquisitions: Their Role in the Process of Diversification of an Enterprise," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 13(01), pages 37-52.

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