Xuejing Xing

Does Corporate Diversification Reduce Firm Risk? Evidence from Diversifying Acquisitions

The main purpose of this paper is to investigate empirically whether corporate diversification reduces the risk of the diversifying firm. We investigate this issue using a sample of diversifying acquisitions and various risk measures. We find that corporate diversification tends to decrease the risk of some firms but increase the risk of many others. On average corporate diversification does not lower firm risk. These findings call into question the notion that corporate diversification strictly reduces firm risk.

The empirical relationship between risk and return: evidence from the UK stock market

Abstract Previous studies reach no consensus on the relationship between risk and return using data from one market. We argue that the world market factor should not be ignored in assessing the risk–return relationship in a partially integrated market. Applying a bivariate generalized autoregressive conditional heteroscedasticity in mean (GARCH-M) model to the weekly stock index returns from the UK and the world market, we document a significant positive relationship between stock returns and the variance of returns in the UK stock market after controlling for the covariance of the UK and the world market return. In contrast, conventional univariate GARCH-M models typically fail to detect this relationship. Nonnested hypothesis tests supplemented with other commonly used model selection criteria unambiguously demonstrate that our bivariate GARCH-M model is more likely to be the true model for UK stock market returns than univariate GARCH-M models. Our results have implications for empirical assessments of the risk–return relationship, expected return estimation, and international diversification.

R 2 : Does it Matter for Firm Valuation?

A considerable amount of research has been devoted to why R2 differs across firms or markets, although little attention has been paid to the consequences of this difference. We fill this gap by investigating how differing R2 affects investors’ assessment of firm value. Using a sample of 90,111 firm-year observations from 1970 to 2004, we find that higher R2 leads to higher firm valuation and that, on average, high-R2 firms experience significant underperformance in the long run. These results suggest that high-R2 firms tend to be overpriced.