Date of Award

Spring 2003

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Finance

Committee Director

Kenneth Yung

Committee Member

Mohammad Najand

Committee Member

Vinod Agarwal


There are considerable empirical evidences in favor of and against the corporate diversification. A number of previous studies have found that industrial and geographic diversification have a negative effect on the value of the firm and the stock returns. In contrast, a growing stream of literature provides evidence in support of the diversification premium. There is no consensus on whether the documented discount can be attributed to corporate diversification per se or to the firms' characteristics other than diversification. In this study, we re-examine the impact of industrial and/or geographic diversification on the stock returns.

The investigation of the comprehensive sample of publicly traded firms over the last 20 years reveals that industrially diversified firms do not under-perform. While they are systematically different from single-segment firms, we did not uncover any abnormal performance that can be attributed to the industrial diversification per se. In addition, we find evidence in support of the previous studies about the beneficial effect of geographic diversification. Our results suggest that, in 1990s, industrially focused firms with operations abroad were rewarded more than purely domestic firms. This result is robust to the model specification and does not change whether the four-factor model or the characteristic-based model is used.

However, the examination of corporate diversification events—mergers and acquisitions—reveals different picture with respect to industrial diversification. Our results suggest that acquisitions of independent firms outside of existing lines of business have a negative effect on shareholder value. Annual average buy-and-hold abnormal returns for firms acquiring targets in unrelated lines of business is about 15% more negative than that of firms acquiring targets in related lines of business. Pre-merger targets' performance or differences in firm-specific characteristics cannot explain this post-merger return difference. Moreover, post-merger return changes cannot be explained by mergers' characteristics, such as transaction size, method of payment or acquisition premia. Furthermore, examination of cumulative monthly abnormal returns reveals that although acquiring firms in both related and unrelated mergers experience post-merger returns decline, the performance of unrelated firms deteriorates much faster in unrelated than in related acquisitions.

The overall results can be summarized as follows. Corporate diversification changes the nature of the firm. Not only the composition of the firm becomes different, the overall firm's risk characteristics change. Thus, corporate diversification has an impact on firm value through changes of the firm's characteristics. Moreover, corporate diversification per se becomes an important firm characteristic that affects stock returns in addition to other firm-specific characteristics.