EFFECTS OF CORPORATE DIVERSIFICATION ON FIRM EXCESS VALUE IN MALAYSIA: A STUDY ON MALAYSIAN LISTED COMPANIES
Keywords:
Corporate diversification, Firm excess valueAbstract
This paper examines whether corporate diversification will have any effects on firm excess value in Malaysia and whether diversification will enhance the firm value when companies diversify to more segments. The findings reveal that diversification destroys firm excess value in Malaysia during year 2006 to 2008. Furthermore, the higher of a firm’s diversification level, the lower firm value it has, suggesting single-segmented firms in Malaysia perform better than multi-segmented firms. The Malaysian firms should therefore invest surplus fund in their core business operations as diversification does not add value to portfolio.
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References
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Krishnasamy, G., Ridzwa, A.H., & Perumal, V. (2004). Malaysian post merger banks’ productivity: Application of Malmquist productivity index. Managerial Finance, 30(4), 63‒74.
Lamont, O. A., & Polk, C. (2002). Does diversification destroy value? Evidence from the industry shocks. Journal of Financial Economics, 63, 51‒77.
Lane, P. J., Cannella, A. A., & Lubatkin, M. H. (1998). Agency problems as antecedents to unrelated diversification: Amihud and Lev reconsidered. Strategic Management Journal, 19, 555‒578.
Lewellen, W. (1971). A pure financial rationale for the conglomerate merger. Journal of Finance, 26(2), 521‒537.
Lyandres, E. (2007). Strategic cost of diversification. Review of Financial Studies, 20(6), 1901-1940.
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Markides, C. C., & Williamson, P. J. (1994). Related diversification, core competencies and corporate performance. Strategic Management Journal, 15, 149‒165.
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Matsusaka, J.G. (2001). Corporate diversification, value maximization, and organizational capabilities, Journal of Business, 74(3), 409‒431.
Morck, R., Shleifer, A., & Vishny, R.W. (1990). Do managerial objectives drive bad acquisitions? The Journal of Finance, 45(1), 31‒48.
Rajan, R., Servaes, H., & Zingales, L. (2000). The cost of diversity: the diversification discount and inefficient investment. Journal of Finance, 55(1), 35‒80.
Rasidah, M.S., Fauzias, M.N., Soo, W.L., & Aisyah, A.R. (2008). The efficiency effects of mergers and acquisitions in Malaysian banking institutions. Asian Journal of Business and Accounting, 1(1), 47‒66.
Rumelt, R.P. (1974). Strategy, structure and economic performance. Cambridge: Harvard University Press.
Sufian, F., & Ibrahim, S. (2005). An analysis of the relevance of off-balance sheet items in explaining productivity change in post-merger bank performance: Evidence from Malaysia. Management Research News, 28(4), 74‒92.
Villalonga, B. (2004). Does diversification cause the “diversification discount”? Financial Management, 33, 5‒27.
Winton, A. (1999). Don’t put all your eggs in one basket? Diversification and specialization in lending. Wharton Working Paper 00‒16.
Berger, P. G., & Ofek, E. (1995). Diversification’s effect on firm value. Journal of Financial Economics, 37, 39–65.
Booz, Allen, & Hamilton (1985). Diversification: A survey of European chief executives –Executive summary. New York: Booz, Allen and Hamilton.
Campa, J., & Kedia, S. (2002). Explaining the diversification discount. Journal of Finance, 57, 1731‒62.
DeLong, G.L. (2003). Does long-term performance of mergers match market expectation? Evidence from the U.S. banking industry. Financial Management, 32, 5‒25.
Demsetz, R.S., & Strahan, P.H. (1997). Diversification, size, and risk at bank holding companies. Journal of Money, Credit and Banking, 29(3), 300–313.
Fan, J. P. H., & Lang, L. H. P. (2000). The measurement of relatedness: an application to corporate diversification. The Journal of Business, 73, 629‒660.
Fauzias, M.N. (2004). A note on market reactions on the choice between equity and cash: Evidence from bidder’s return on takeovers by non banking and banking sector, Proceedings of the Malaysian Finance Association 6th Annual Symposium (56‒68). Langkawi, Malaysia.
Fauzias, M.N., & Mohamed, H. (2003). Effect of mergers and acquisitions on efficiency of banking institutions in Malaysia: A DEA approach, Proceedings of the Malaysian Finance Association 5th Annual Symposium (351‒359). Cyberjaya, Malaysia.
Fauzias, M.N., Rasidah, M.S., & Mohamed, H. (2005). Share prices behavior, financial performance and efficiency changes of Malaysian banking institutions in mergers and acquisitions – revisited, Proceedings of the Malaysian Finance Association 7th Annual Conference (424‒439). Kuala Terengganu, Malaysia.
Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76(2), 323‒329.
Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305‒360.
Klein, P. (2001). Were the acquisitive conglomerates inefficient? RAND Journal of Economics, 32, 745‒761.
Krishnasamy, G., Ridzwa, A.H., & Perumal, V. (2004). Malaysian post merger banks’ productivity: Application of Malmquist productivity index. Managerial Finance, 30(4), 63‒74.
Lamont, O. A., & Polk, C. (2002). Does diversification destroy value? Evidence from the industry shocks. Journal of Financial Economics, 63, 51‒77.
Lane, P. J., Cannella, A. A., & Lubatkin, M. H. (1998). Agency problems as antecedents to unrelated diversification: Amihud and Lev reconsidered. Strategic Management Journal, 19, 555‒578.
Lewellen, W. (1971). A pure financial rationale for the conglomerate merger. Journal of Finance, 26(2), 521‒537.
Lyandres, E. (2007). Strategic cost of diversification. Review of Financial Studies, 20(6), 1901-1940.
Madura, J., & Wiant, K.J. (1994). Long-term valuation effects of bank acquisitions. Journal of Banking & Finance, 18, 1135‒1154.
Mahmood, W.M., & Mohamad, R. (2004). Does operating performance really improve following financial institutions merger: A case of Malaysian banks. In Proceedings of the Malaysian Finance Association 6th Annual Symposium (pp. 701‒719). Langkawi, Malaysia: Revitalising the financial market: The tasks ahead.
Maksimovic, V., & Phillips, G. (2002). Do conglomerate firms allocate resources inefficiently across industries? Theory and evidence. Journal of Finance, 57(2), 721‒767.
Mansor, I., & Yap, C.M. (2003). Market reaction to merger announcement: The case of consolidation of the banking sector in Malaysia, Proceedings of the Malaysian Finance Association 5th Annual Symposium (509‒539). Cyberjaya, Malaysia.
Markides, C. C., & Williamson, P. J. (1994). Related diversification, core competencies and corporate performance. Strategic Management Journal, 15, 149‒165.
Martin, J. D., & Sayrak, A. (2003). Corporate diversification and shareholder value: a survey of recent literature. Journal of Corporate Finance, 9, 37‒57.
Matsusaka, J.G. (2001). Corporate diversification, value maximization, and organizational capabilities, Journal of Business, 74(3), 409‒431.
Morck, R., Shleifer, A., & Vishny, R.W. (1990). Do managerial objectives drive bad acquisitions? The Journal of Finance, 45(1), 31‒48.
Rajan, R., Servaes, H., & Zingales, L. (2000). The cost of diversity: the diversification discount and inefficient investment. Journal of Finance, 55(1), 35‒80.
Rasidah, M.S., Fauzias, M.N., Soo, W.L., & Aisyah, A.R. (2008). The efficiency effects of mergers and acquisitions in Malaysian banking institutions. Asian Journal of Business and Accounting, 1(1), 47‒66.
Rumelt, R.P. (1974). Strategy, structure and economic performance. Cambridge: Harvard University Press.
Sufian, F., & Ibrahim, S. (2005). An analysis of the relevance of off-balance sheet items in explaining productivity change in post-merger bank performance: Evidence from Malaysia. Management Research News, 28(4), 74‒92.
Villalonga, B. (2004). Does diversification cause the “diversification discount”? Financial Management, 33, 5‒27.
Winton, A. (1999). Don’t put all your eggs in one basket? Diversification and specialization in lending. Wharton Working Paper 00‒16.
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Published
2019-03-06
How to Cite
AIK, N.-C., & Tee, P.-L. (2019). EFFECTS OF CORPORATE DIVERSIFICATION ON FIRM EXCESS VALUE IN MALAYSIA: A STUDY ON MALAYSIAN LISTED COMPANIES. Journal of Contemporary Issues and Thought, 3, 67–76. Retrieved from https://ojs.upsi.edu.my/index.php/JCIT/article/view/978
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