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Temple University

1. Wang, Yong. Diversification, information asymmetry, cost of capital, and production efficiency.

Degree: PhD, 2008, Temple University

Business Administration

This study examines how diversification changes firms' key characteristics, which consequently alter firms' value. The reason why I focus on this topic is because of the mixed findings in literature about the valuation effect of diversification. This study offers deeper insights to the influence of diversification on important valuation factors that are already identified in finance literature. Specifically, it examines if diversification affects firms' information asymmetry problem, firms' cost of capital and cash flow, and firms' production efficiency. The study looks at both the financial industry and non-financial industry and the chapters are arranged in the following order. Firstly, empirical studies show that investors do not value BHCs' pursuit of non-interest income generating activities and yet these activities have demonstrated a dramatic pace of growth in the recent decades. An interesting question is what factors drive the discontent of the investors with the diversification endeavors of the BHCs in non-interest income activities. The first chapter examines the subject from the view point of information opaqueness, which is unique in the banking industry in terms of its intensity. We propose that increased diversification into non-interest income activities deepens information asymmetry, making BHCs more opaque and curtailing their value, as a result. Two important results are obtained in support of this proposition. First, analysts' forecasts are less accurate and more dispersed for the BHCs with greater diversity of non-interest income activities, indicating that information asymmetry problem is more severe for these BHCs. Second, stock market reactions to earning announcements by these BHCs signaling new information to the market are larger, indicating that more information is revealed to the market by each announcement. These findings indicate that increased diversity of non-interest income activities is associated with more severe information asymmetry between insiders and outsiders and, hence, a lower valuation by shareholder. Secondly, since Lang and Stulz (1994) and Berger and Ofek (1995), corporate literature has taken the position that industrial diversification is associated with a firm value discount. However, the validity and the sources of the diversification discount are still highly debated. In particular, extant studies limit themselves to cash flow effects, totally overlooking the cost of capital as a factor determining firm value. Inspired by Lamont and Polk (2001), the second chapter examines how industrial and international diversification change the conglomerates' cost of capital (equity and debt), and thereby the firm value. Our empirical results, based on a sample of Russell 3000 firms over the 1998-2004 period, show that industrial (international) diversification is associated with a lower (higher) firm cost of capital. These findings also hold for firms fully financed with equity. In addition, international diversification is found to be associated…

Advisors/Committee Members: Elyasiani, Elyas, Chen, Zhaohui, Mansur, Iqbal, Mao, Connie X., Pagano, Michael A., Reeb, David.

Subjects/Keywords: Business Administration, Banking; Diversification; Information Asymmetry; Cost of Capital; Efficiency

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APA · Chicago · MLA · Vancouver · CSE | Export to Zotero / EndNote / Reference Manager

APA (6th Edition):

Wang, Y. (2008). Diversification, information asymmetry, cost of capital, and production efficiency. (Doctoral Dissertation). Temple University. Retrieved from http://digital.library.temple.edu/u?/p245801coll10,13948

Chicago Manual of Style (16th Edition):

Wang, Yong. “Diversification, information asymmetry, cost of capital, and production efficiency.” 2008. Doctoral Dissertation, Temple University. Accessed July 20, 2019. http://digital.library.temple.edu/u?/p245801coll10,13948.

MLA Handbook (7th Edition):

Wang, Yong. “Diversification, information asymmetry, cost of capital, and production efficiency.” 2008. Web. 20 Jul 2019.

Vancouver:

Wang Y. Diversification, information asymmetry, cost of capital, and production efficiency. [Internet] [Doctoral dissertation]. Temple University; 2008. [cited 2019 Jul 20]. Available from: http://digital.library.temple.edu/u?/p245801coll10,13948.

Council of Science Editors:

Wang Y. Diversification, information asymmetry, cost of capital, and production efficiency. [Doctoral Dissertation]. Temple University; 2008. Available from: http://digital.library.temple.edu/u?/p245801coll10,13948

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