Corporate Focus versus Diversification: The Role of Growth Opportunities and Cashflow
We examine the valuation impact of corporate diversification strategies through an analysis of a set of international joint ventures which contain both focus-decreasing and focus-increasing investments. Consistent with previous findings reported for US firms, we find that focus-increasing joint ventures create value for shareholders. However, we do not find that corporate diversification uniformly reduces shareholder value, either at the announcement of the project or in the long-run. Diversifying joint ventures negatively impact shareholder wealth only when the investing firms have poor growth opportunities and a weak cashflow position. After controlling for the q and cashflow effects, we find no significant difference in the market reaction to focus-increasing and -decreasing joint ventures. Such a result implies that the impact of diversification on shareholder wealth is not absolute, but rather is conditional upon the financial resources and growth opportunities available to the firm.
Accounting | Corporate Finance
Financial Performance Analysis
Journal of International Financial Markets, Institutions and Money
LIM, Chee Yeow; Ferris, Stephen; Sen, Nilanjan; and Yeo, Gillian Hian Heng.
Corporate Focus versus Diversification: The Role of Growth Opportunities and Cashflow. (2002). Journal of International Financial Markets, Institutions and Money. 3, (3), 231-252. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/678