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Public lecture: Is There a Diversification Discount? A Re-examination

Lecturer: Associate Professor ZHOUXianming, Australian National University

Host: Associate Professor XIAO Wei, Research Institute of Economics and Management

Time: 13:55-15:30 Friday, Nov. 23, 2018                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Venue: 412 Room, Block H, YideBuilding, Liulin Campus, Southwestern University of Finance and Economics

Organizer:Research Institute of Economics and Management and Office of Research Affairs

Introduction to the speaker:

Dr. ZHOU Xianmingis an associate professor of Finance at Australian National University, and mainly engaged in corporate finance, capital market and so on. His several papers have been published in Journal of Finance and Quantitative Analysis, International Review of Finance, Journal of Banking and Finance, Journal of Corporate Finance and other well-known international journals.

Content summary:

The standard approach in the research of the diversification discount is to examine the excess value estimated from a valuation multiple. The excess value metric has two distinct properties: (1) a segment-size effect due to the link of the multiple to segment size; and (2) an imputed-value uncertainty effect due to the concavity of the excess value function. We first analyze fake conglomerates that are formed from randomly drawn pure-play firms to verify these two effects. Whereas involving no business diversification, these two effects are unusually strong. We then reexamine the diversification discount using real firm data. In a standard empirical framework, we show that the diversification discount disappears after controlling for segment size and imputed value uncertainty.