Keven Yost

GLOBAL DIVERSIFICATION, INDUSTRIAL DIVERSIFICATION, AND FIRM VALUE

Using a sample of 44,288 firm-years between 1984 and 1997, we document an increase in the extent of global diversification over time. This trend does not ref lect a substitution of global for industrial diversification. We also find that global diversification results in average valuation discounts of approximately the same magnitude as those for industrial diversification. Analysis of the changes in excess value associated with changes in diversification reveals that increases in global diversification reduce excess value, while reductions in global diversification increase excess value. These findings support the view that the costs of global diversification outweigh the benefits. A CONSIDERABLE FRACTION OF U.S. CORPORATIONS diversify their operations, either across multiple lines of business ~industrial diversification!, across different national markets ~global diversification!, or both. Over the past decade, an extensive academic literature has developed documenting the causes and consequences of industrial diversification. Studies in this literature report that, on average, diversified firms are valued at a discount relative to a portfolio of comparable, single-segment firms. This value discount appears to stem, in part, from inefficient investment policies. In addition, the evidence indicates a trend towards less industrial diversification since the mid1980s, as well as a gain in shareholder value associated with refocusing strategies.1 Because industrial diversification potentially benefits corporate managers through increased power and prestige, through compensation arrange*David Denis, Diane Denis, and Keven Yost are from the Krannert Graduate School of Management at Purdue University. We appreciate helpful suggestions received from Espen Eckbo; Laura Field; Rick Green; John McConnell; Ralph Walkling; an anonymous referee; and seminar participants at Miami, Northeastern, Notre Dame, Ohio State, Penn State, the University of Texas-Dallas, the Joint Symposium of the 11th Annual Conference on Financial Economics and Accounting, and the 7th Annual Mitsui Life Symposium on Global Financial Markets at the University of Michigan. This project has been funded in part by a summer research grant from Purdue University’s Center for International Business and Education Research ~CIBER!. 1 For evidence on the valuation effects of industrial diversification, see Lang and Stulz ~1994!, Berger and Ofek ~1995!, and Servaes ~1996!. Evidence on the investment policies of diversified firms can be found in Scharfstein ~1998!; Shin and Stulz ~1998!; Denis and Thothadri ~1999!; and Rajan, Servaes, and Zingales ~2000!. For evidence on the trend towards increased corporate focus and the valuation consequences of this increased focus, see Comment and Jarrell ~1995!. THE JOURNAL OF FINANCE • VOL. LVII, NO. 5 • OCTOBER 2002

Credibility and Multiple SEOs: What Happens When Firms Return to the Capital Market?

Using a sample of firms that conducted multiple SEOs during 1995-2012, we examine whether firms can build credibility for subsequent SEOs by following through on their stated use of proceeds from earlier SEOs. We find that firms that previously state their intention to invest funds in projects and those that make no such statements but nevertheless make investments both have relatively more positive announcement returns around subsequent SEO announcements. Our results suggest that markets are aware of potential agency costs of equity, have a long memory, and update their beliefs as to the likely use of funds raised by firms.

Corporate risk and corporate governance: another view

Purpose - The purpose of this paper is to investigate the effect of corporate governance strength as measured by the Gompers governance index (gindex) and other related factors on corporate risk as measured by implied volatility of returns. Design/methodology/approach - The research incorporates implied volatility as the measure of risk, as compared to earlier studies that have used historic volatility measures. Governance variables include the Gompers Index, as well as other measures to control for firm size, ownership and leverage. Findings - The findings indicate that corporate risk is significantly inversely-related with the gindex, which essentially gauges how extensively antitakeover provisions are adopted by a firm. Firm size is the other variable significant in both univariate and multivariate models. Financial leverage and the percentage of outsiders on the board are significantly related to firm risk when not controlling for other factors. Board percentage of voting power does not appear to affect firm riskiness statistically. Research limitations/implications - Future research needs to examine specifically why higher takeover defenses lead to lower implied volatility. This includes exploring whether the lower level of expected volatility is due to lower levels of takeover activity or whether firms with poor governance assume a suboptimal amount of risk. Originality/value - The paper contributes to the literature by the use of implied volatility as the measure of risk. The results are robust and provide further support for the relationship between corporate governance and risk. While counter to initial expectations, these results suggest, at the very least, a firm with good governance may not necessarily have low implied volatility in its stock price.

To be euro or not to be euro: a comparative analysis of banking systems

For the past half century, European countries have moved to harmonize their economies. While there has been a push for a single banking market in Europe, the 25 European Union (EU) countries have still not achieved full harmonization. The purpose of this study is to explore similarities and differences in country-specific banking system attributes between member nations in the EU that have adopted the Euro and those that have not. We find evidence suggesting that the currency adoption decision is related to the level of market disclosure and openness. In general, countries that have adopted the Euro have the strongest quality of information and greatest protection against the exploitation of banking entities.