Is there a corporate diversification discount or premium? Evidence from Chile

2015. Academia Revista Latinoamericana de Administracion. Vol 28, Nº 3, Pp 396-418

Felix Lopez I, Christian Espinoza M, Mauricio Jara B

Abstract:

Purpose We analyzed the effect of the corporate ownership diversification, i.e., how the involvement in the ownership of other non-financial firms affects the value of listed firms. We controlled for unrelated diversification when the firm has different business segments in different sectors.

Design/methodology/approach We analyzed a sample of Chilean listed firms between 2005 and 2009, in two stages. First, we computed the diversification premium or discount, defined as the part of the firms’ capitalization that stems from the diversification strategy. Then, we regressed the premium or discount against the business and ownership diversification measures and other control variables. Findings In addition to a discount for unrelated business diversification, we found an ownership diversification discount when non-financial firms are shareholders of other firms. However, this discount turns into a premium when the firm gains control of the owned firm, especially in related sectors.

Originality/value We pioneer the analysis of the ownership diversification in Latin American firms. Our results apply not only to Chile but also to a number of Latin American countries since many of these countries have, in common with Chile, a concentrated corporate ownership structure and a weak protection of investors’ rights

Palabras claves: Emerging Latin-American Markets, Chilean Firms, Unrelated Diversification, Ownership participation, Firm’s Value

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