The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies

 

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dc.contributor.advisor Correia, Carlos en_ZA
dc.contributor.author Weldeslassie, Samson en_ZA
dc.date.accessioned 2016-05-04T07:48:04Z
dc.date.available 2016-05-04T07:48:04Z
dc.date.issued 2005 en_ZA
dc.identifier.citation Weldeslassie, S. 2005. The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies. University of Cape Town. en_ZA
dc.identifier.uri http://hdl.handle.net/11427/19384
dc.description.abstract 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. en_ZA
dc.language.iso eng en_ZA
dc.subject.other Financial Management en_ZA
dc.title The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies en_ZA
dc.type Master Thesis
uct.type.publication Research en_ZA
uct.type.resource Thesis en_ZA
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Commerce en_ZA
dc.publisher.department Department of Finance and Tax en_ZA
dc.type.qualificationlevel Masters
dc.type.qualificationname MCom en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Weldeslassie, S. (2005). <i>The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. Retrieved from http://hdl.handle.net/11427/19384 en_ZA
dc.identifier.chicagocitation Weldeslassie, Samson. <i>"The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2005. http://hdl.handle.net/11427/19384 en_ZA
dc.identifier.vancouvercitation Weldeslassie S. The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies. [Thesis]. University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2005 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/19384 en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Weldeslassie, Samson AB - 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. DA - 2005 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2005 T1 - The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies TI - The effect of corporate diversification on firm value : an emphirical assessment of the JSE securities exchange listed companies UR - http://hdl.handle.net/11427/19384 ER - en_ZA


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