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

• Main Authors: LIM, Chee Yeow, Ferris, Stephen, Sen, Nilanjan, Yeo, Gillian Hian Heng
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2002
• Subjects: Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/678; http://dx.doi.org/10.1016/s1042-4431(02)00005-7
• Institution: Singapore Management University

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.