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The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies
This paper examines the value effect corporate diversification on firms listed on the JSE Exchange. The value gain or loss for the diversified firms is measured using Berger and Ofek's (1995) model that estimates the value of diversified companies' segments as though they were independent companies....
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| Format: | Thesis |
| Language: | English |
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Department of Finance and Tax
2016
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| _version_ | 1867613156122034176 |
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| access_status_str | Open Access |
| author | Weldeslassie, Samson |
| author2 | Correia, Carlos |
| author_browse | Correia, Carlos Weldeslassie, Samson |
| author_facet | Correia, Carlos Weldeslassie, Samson |
| author_sort | Weldeslassie, Samson |
| collection | Thesis |
| description | This paper examines the value effect corporate diversification on firms listed on the JSE Exchange. The value gain or loss for the diversified firms is measured using Berger and Ofek's (1995) model that estimates the value of diversified companies' segments as though they were independent companies. The result indicates corporate diversification in South Africa is value enhancing. Evidence shows that sample of diversified companies are traded, on average, 39-57 (Excess Value 0.33 to 0.45) percent above the industry averages. The value gain is higher in related-diversification than unrelated ones. A similar assessment of a sample of 57 focused companies showed a much lower Excess Value (EV). The EV for diversified companies (0.33 - 0.45) is higher than the EV for focused companies (0.00 - 0.19) suggesting that diversified companies are traded at premium as compared to focused companies. Further analysis of the result shows that the value gain is higher in the medium sized sample companies as compared to the bigger companies. Regression of the EV in relation to firms' characteristics (number of segments per company, capital expenditure, and profitability) showed no significant relationship. To explain the possible sources for higher premium shown in diversified companies, analysis of the companies leverage and tax rate shows that diversified companies have, on average 13% lower debt-to-assets ratio and pay 4.13% lower tax rate than focused companies. It suggests that higher leverage, which gives companies greater tax shield, is not one the sources for the observed higher premium. It, however, indicates that a lower tax derived by combining businesses with imperfectly correlated cash flows can be one of the contributing factors for the value gain. A comparison of Price-to-Earning and Price-to-Book value ratios for the sample diversified and focused companies suggests, in contradiction with the above results, that focused companies perform better than diversified companies. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/19384 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:31:38.662Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2016 |
| publishDateRange | 2016 |
| publishDateSort | 2016 |
| publisher | Department of Finance and Tax |
| publisherStr | Department of Finance and Tax |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/19384 The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies Weldeslassie, Samson Correia, Carlos Financial Management This paper examines the value effect corporate diversification on firms listed on the JSE Exchange. The value gain or loss for the diversified firms is measured using Berger and Ofek's (1995) model that estimates the value of diversified companies' segments as though they were independent companies. The result indicates corporate diversification in South Africa is value enhancing. Evidence shows that sample of diversified companies are traded, on average, 39-57 (Excess Value 0.33 to 0.45) percent above the industry averages. The value gain is higher in related-diversification than unrelated ones. A similar assessment of a sample of 57 focused companies showed a much lower Excess Value (EV). The EV for diversified companies (0.33 - 0.45) is higher than the EV for focused companies (0.00 - 0.19) suggesting that diversified companies are traded at premium as compared to focused companies. Further analysis of the result shows that the value gain is higher in the medium sized sample companies as compared to the bigger companies. Regression of the EV in relation to firms' characteristics (number of segments per company, capital expenditure, and profitability) showed no significant relationship. To explain the possible sources for higher premium shown in diversified companies, analysis of the companies leverage and tax rate shows that diversified companies have, on average 13% lower debt-to-assets ratio and pay 4.13% lower tax rate than focused companies. It suggests that higher leverage, which gives companies greater tax shield, is not one the sources for the observed higher premium. It, however, indicates that a lower tax derived by combining businesses with imperfectly correlated cash flows can be one of the contributing factors for the value gain. A comparison of Price-to-Earning and Price-to-Book value ratios for the sample diversified and focused companies suggests, in contradiction with the above results, that focused companies perform better than diversified companies. 2016-05-04T07:48:04Z 2016-05-04T07:48:04Z 2005 Master Thesis Masters MCom http://hdl.handle.net/11427/19384 eng application/pdf Department of Finance and Tax Faculty of Commerce University of Cape Town |
| spellingShingle | Financial Management Weldeslassie, Samson The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies |
| thesis_degree_str | Master's |
| title | The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies |
| title_full | The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies |
| title_fullStr | The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies |
| title_full_unstemmed | The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies |
| title_short | The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies |
| title_sort | effect of corporate diversification on firm value an emphirical assessment of the jse securities exchange listed companies |
| topic | Financial Management |
| url | http://hdl.handle.net/11427/19384 |
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