Diversification’s effect on firms listed in the Brazilian exchange

Authors

  • Thomaz Freire de Carvalho FGV
  • Marcelo Verdini Maia PUC-RJ/IAG
  • Claudio Henrique da Silveira Barbedo IBMEC

Keywords:

diversification, Tobin’s q, enterprise value, value drivers, segment relatedness

Abstract

This work provides evidence on how negative correlated is diversification and enterprise value. Following Lang and Stulz (1994) methodology, our aim is to verify the correlation between firms’ market value and diversification strategies. The negative relationship is observed for different measures of diversification and holds even if we control the effect of other variables known to be value drivers as investment, debt, profit and firm size. The results indicate that, as the focused companies, the highly diversified ones have also a greater value than the others. Finally, the contribution of this paper is that the negative diversification falls when it appears in more related segments and the effect of diversification on the enterprise value begins to be positive if we consider only the years of crises in our sample. We distinguished two consequences: non defined diversification strategies mean the worst performance and crisis mean better performance by diluting the risks impact. The study has some limitations because most of the Brazilian firms deal with highly correlated business portfolio.

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Author Biographies

Thomaz Freire de Carvalho, FGV

Mestre em Economia pela Escola de Pós-Graduação em Economia da Fundação Getulio Vargas

Analista do Departamento de Relação com os Investidores da Vale S.A.

Marcelo Verdini Maia, PUC-RJ/IAG

Ph.D. em Finanças pelo Finance Department da University of Pennsylvania

Professor do Departamento de Economia do Instituto Brasileiro de Mercado de Capitais

Claudio Henrique da Silveira Barbedo, IBMEC

Doutor em Finanças pelo Programa de Pós-graduação em Administração da Universidade Federal do Rio de Janeiro

Professor do Departamento de Economia do Instituto Brasileiro de Mercado de Capitais 

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Published

2011-11-10

Issue

Vol. 13 No. 1 (2012)

Section

Strategic Finances

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