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The effect of diversification on company value during a global health crisis: evidence from the COVID-19 pandemic

  • Purpose The authors study the valuation effect of corporate diversification in the initial phase of the COVID-19 pandemic in 2020 in Europe. Design/methodology/approach Applying a cross-sectional regression model to a sample of public companies headquartered in the European Union, the authors investigate the existence of and the change in a diversification discount between 2018 and 2020. By applying the Excess Q methodology, the authors make an industry adjustment of diversified companies to measure the value effect of corporate diversification. Findings The authors find an economically and statistically significant diversification discount that increases from an average Excess Q of −0.05 in 2019 to −0.10 in 2020. The diversified companies' inferior fundamental financial performance in 2020 accompanies the discount. The results deviate from those of previous research, which mostly show a decrease in the diversification discount in economic crises, and thereby, shed doubt on whether diversification provides insurance against pandemic-induced adverse value effects. Originality/valueThe study distinguishes the role of corporate diversification during recessionary periods by establishing that the valuation effect of diversification depends on the nature of the crisis. The analysis incorporates criticism of previous studies concerning a biased methodology and uniform data source by applying the Excess Q methodology and using FactSet industry segment data.

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Metadaten
Author of HS ReutlingenBeyer, Hans-Martin; Goeddeke, Anna; Fruehling, Niklas
DOI:https://doi.org/10.1108/MF-06-2022-0251
ISSN:0307-4358
eISSN:1758-7743
Erschienen in:Managerial finance
Publisher:Emerald
Place of publication:Bingley
Document Type:Journal article
Language:English
Publication year:2023
Tag:COVID-19 pandemic; Tobin's Q; crisis; discount; diversification; european union; industry bias; multiple linear regression; valuation
Volume:49
Issue:8
Page Number:15
First Page:1327
Last Page:1341
PPN:Im Katalog der Hochschule Reutlingen ansehen
DDC classes:330 Wirtschaft
Open access?:Nein
Licence (German):License Logo  In Copyright - Urheberrechtlich geschützt