Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases
Journal
Journal of Business Finance and Accounting
Journal Volume
38
Journal Issue
7-8
Pages
887-914
Date Issued
2011-09
Author(s)
Chen, I. Ju
Abstract
We provide evidence that investment efficiency considerations are important in assessing changes in firm value surrounding asset purchases. We account for both the potential endogeneity in purchase decisions and the measurement error in Tobin'sq. We find that post-purchase, there are significant declines in both excess value and investment efficiency. This trend occurs primarily among those firms that demonstrate increased diversity following purchases. The change in excess value for diversity-increasing buyers is positively related to the change in investment allocation surrounding the purchase. © 2011 Blackwell Publishing Ltd.
Subjects
Asset purchases | Diversification | Endogeneity | Inefficient investment hypothesis
Publisher
WILEY-BLACKWELL
Type
journal article