Publication type: Article in scientific journal
Type of review: Peer review (publication)
Title: Is there really no conglomerate discount?
Authors: Ammann, Manuel
Höchle, Daniel
Schmid, Markus
DOI: 10.1111/j.1468-5957.2011.02261.x
Published in: Journal of Business Finance and Accounting
Volume(Issue): 39
Issue: 1-2
Page(s): 264
Pages to: 288
Issue Date: 2012
Publisher / Ed. Institution: Wiley
ISSN: 0306-686X
Language: English
Subjects: Organizational structure; Diversification; Market value of debt; Endogeneity; Fixed effects
Subject (DDC): 657: Accounting
Abstract: Recent research questions the existence of a conglomerate discount. This study addresses two of the most important explanations for the conglomerate discount and finds evidence in support of an economically and statistically significant discount. The first explanation is that the risk‐reducing effect of diversification increases debt value and consequently the use of the book value of debt leads to an underestimation of firm value in diversified firms. We show that the effect of using an imputed market value of debt reduces the conglomerate discount only by a small fraction. However, consistent with the value‐transfer hypothesis, we find the discount to increase in leverage and no discount for all‐equity firms. An agency cost‐based explanation, which reconciles these conflicting findings, is that managers in levered firms become aligned with creditors and reduce firm risk at the expense of shareholders. Hence, the diversification discount only occurs in levered firms and stems from conflicts of interest between managers and shareholders over corporate risk taking. Second, the conglomerate discount may emerge from a neglect of the endogenous nature of the diversification decision. We first show that the conglomerate discount in fact disappears when we account for endogeneity in a Heckman selection model. However, when we account for fixed effects, the conglomerate discount remains statistically and economically significant, also in a Heckman selection‐model or instrumental variables framework.
URI: https://digitalcollection.zhaw.ch/handle/11475/9065
Fulltext version: Published version
License (according to publishing contract): Licence according to publishing contract
Departement: School of Management and Law
Appears in collections:Publikationen School of Management and Law

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