The author thanks Doug Foster, Bruce Grundy, Shi Jing, Arie Melnik, John Powell, Tom Smith, Garry Twite, Ralph Walkling, Emma Welch, and seminar participants at the 2006 Asian FA/FMA Conference, 2006 Financial Integrity Research Network (FIRN) PhD Finance Research Workshop, and 2006 FIRN Doctoral Tutorial for their helpful comments.
Two Sides of a Coin: Endogenous and Exogenous Effects of Corporate Diversification on Firm Value†
Article first published online: 13 JUN 2012
© 2012 The Author. International Review of Finance © International Review of Finance Ltd. 2012
International Review of Finance
Volume 12, Issue 4, pages 375–397, December 2012
How to Cite
He, X. (2012), Two Sides of a Coin: Endogenous and Exogenous Effects of Corporate Diversification on Firm Value. International Review of Finance, 12: 375–397. doi: 10.1111/j.1468-2443.2012.01158.x
- Issue published online: 5 DEC 2012
- Article first published online: 13 JUN 2012
We investigate the value effects of two types of corporate diversification – unexpected exogenous diversification and endogenous diversification. Combining Heckman's sample-selection estimator with a two-stage least squares estimator and a generalized method of moments instrumental variables estimator to control for both endogeneity and sample-selection bias, we find that while an unexpected increase in diversification caused by exogenous shocks destroys firm value, an endogenous increase in diversification due to managerial decisions will enhance firm value, indicating a diversification premium from altering organizational structures.