IESE Research Papers
No D/758:
Persistence of outstanding performance and shareholder value among diversified firms: The impact of past performance, efficient internal capital market, and relatedness of business segments
Federico Marinelli ()
Abstract: The research domain that attempts to study the
relationship between diversification and performance has not yet reached
definitive and interpretable findings, and recent studies challenge the
existence of a "diversification discount" and explain it partially by a
data artefact. None of these studies centred their research on the
question: does there exist a specific performance pattern among diversified
firms? This research aims to identify persistence in performance
heterogeneity by measuring the shareholder value creation of diversified
firms using alternative indicators other than the excess value methodology.
It also aims to measure the impact on the performance according to the
degree of efficiency of the internal capital market and the degree of
relatedness among business segments. A sample of 164 diversified firms with
turnover higher than 1$ billion during the period 1999-2006 is examined.
Because of the presence of the firm's specific effect and the length of the
time series, the persistence performance is tested through the instrumental
variables (IV) system generalized method of moments (GMM) dynamic panel
data and the persistence of shareholder value creation and destruction is
estimated according to different estimators from top tercile and lower
tercile portfolios of diversified firms. Some diversified firms
persistently create value as well as beat the market index while others
persistently underperform. Finally, if the efficiency of the internal
capital market gives certain explanatory power of the performance pattern,
but limited compared to the past performance, important insights might be
drawn from the findings that diversified firms with segments in many
unrelated industries perform better than others in few industries or with a
high number of segments; hence the inverted-U curvilinear relationship
between diversification and performance is here not confirmed.
Keywords: diversification; performance persistence; internal capital market; relatedness obusiness segments; (follow links to similar papers)
34 pages, July 15, 2008
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