Corporate Focus versus Diversification: The Role of Growth Opportunities and Cashflow

Publication Type

Journal Article

Publication Date

2002

Abstract

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.

Discipline

Accounting | Corporate Finance

Research Areas

Financial Performance Analysis

Publication

Journal of International Financial Markets, Institutions and Money

Volume

3

Issue

3

First Page

231

Last Page

252

ISSN

1042-4431

Identifier

10.1016/s1042-4431(02)00005-7

Publisher

Elsevier

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