Corporate diversification and shareholder value : New Zealand evidence

Abstract

Corporate diversification is a strategy whereby a firm enters into a business segment that is unrelated or very loosely related to its existing core business activity. In the absence of the agency problems, financial and operational synergies have been proposed as the rationale behind corporate diversification. A large volume of recent overseas studies has indicated that the creation of shareholder value is an unlikely outcome of a diversification strategy. While conglomerates continued to exist in New Zealand, there had been no empirical evidence to either support or reject the prediction that corporate diversification creates shareholder value. This thesis therefore sought to provide such evidence. More specifically, this thesis empirically investigated the value of corporate diversification by comparing the market valuations of the NZSE-listed conglomerates and focused firms in 1991, 1994 and 1997. Due to its academic support, the market-to-book value ratio of a firm's assets was employed to capture the market valuation of firms. In order to isolate the effect of corporate diversification on the market valuation of firms from the influences of other factors, the regression framework was adopted. This study found that corporate diversification does not have any impact on the market valuation of firms. It was also observed that the synergies expected to arise from corporate diversification have, at least in part, not been realised.