The authors gratefully acknowledge the contribution of IBES Inc. for providing earnings per share forecast data, available through the Institutional Brokers Estimate System.
Does Information Asymmetry Explain The Diversification Discount?
Article first published online: 5 MAY 2004
Journal of Financial Research
Volume 27, Issue 2, pages 235–249, June 2004
How to Cite
Best, R. W., Hodges, C. W. and Lin, B.-X. (2004), Does Information Asymmetry Explain The Diversification Discount?. Journal of Financial Research, 27: 235–249. doi: 10.1111/j.1475-6803.2004.t01-1-00081.x
- Issue published online: 5 MAY 2004
- Article first published online: 5 MAY 2004
We examine the diversification discount while controlling for differences in information asymmetry between diversified and nondiversified firms. We show that both diversified and nondiversified firms with higher levels of information asymmetry have discounted firm values relative to firms with lower levels of information asymmetry, although a diversification discount remains at all levels of information asymmetry. Fixed-effect Fama-MacBeth regressions confirm the existence of a statistically significant relation between information asymmetry proxies and excess value, but they also show that a significant diversification discount remains after controlling for differences in information asymmetry and other firm characteristics discussed in earlier studies (e.g., size, profitability, leverage, and capital constraint).