Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases

Authors

  • Sheng-Syan Chen,

    1. The authors are respectively from National Taiwan University and Yuan Ze University, Taiwan. They are grateful for valuable comments from an anonymous referee, Yan-Shing Chen, Dosoung Choi, Frank C. Jen, Cheng-few Lee, Norman C. Strong (Associate Editor), Samuel C. Weaver, and seminar participants at the 2007 International Conference of Financial Management Association and National Taiwan University. I-Ju Chen acknowledges funding from the National Science Council in Taiwan (NSC96–2416-H-228–003). Any remaining errors are the authors’ own.
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  • I-Ju Chen

    Corresponding author
    1. The authors are respectively from National Taiwan University and Yuan Ze University, Taiwan. They are grateful for valuable comments from an anonymous referee, Yan-Shing Chen, Dosoung Choi, Frank C. Jen, Cheng-few Lee, Norman C. Strong (Associate Editor), Samuel C. Weaver, and seminar participants at the 2007 International Conference of Financial Management Association and National Taiwan University. I-Ju Chen acknowledges funding from the National Science Council in Taiwan (NSC96–2416-H-228–003). Any remaining errors are the authors’ own.
      Sheng-Syan Chen, Department of Finance, College of Management, National Taiwan University, No. 85, Sec. 4, Roosevelt Rd., Taipei, Taiwan.
      e-mail: fnschen@management.ntu.edu.tw
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Sheng-Syan Chen, Department of Finance, College of Management, National Taiwan University, No. 85, Sec. 4, Roosevelt Rd., Taipei, Taiwan.
e-mail: fnschen@management.ntu.edu.tw

Abstract

Abstract:  We provide evidence that investment efficiency considerations are important in assessing changes in firm value surrounding asset purchases. We account for both the potential endogeneity in purchase decisions and the measurement error in Tobin's q. We find that post-purchase, there are significant declines in both excess value and investment efficiency. This trend occurs primarily among those firms that demonstrate increased diversity following purchases. The change in excess value for diversity-increasing buyers is positively related to the change in investment allocation surrounding the purchase.

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