corporate diversification and firm value during economic

We would like to thank Arjan Premti and Marek Marciniak for their help with early drafts of this

paper. We are grateful to Luis Garcia-Feijoo and Jeff Madura for their comments and helpful

suggestions.

Corporate Diversification and Firm Value during Economic Downturns

Nikanor Volkov

Department of Finance

College of Business

Florida Atlantic University

Boca Raton, FL 33431

E-mail: [email protected]

Tel: (561) 297-4046

and

Garrett Smith

Department of Finance

College of Business

Florida Atlantic University

Boca Raton, FL 33431

E-mail: [email protected]

Tel: (561) 297-4046

September 2013

2

Abstract

This paper examines the effect of corporate diversification on firm value during periods of

economic downturns. Analysis of diversified firms’ valuation during recessionary periods

reveals a significant increase in relative value of diversified firms. The drivers for the value

increase differ between crises. Improvements in the relative firm value during the 2001 crisis are

in large part due to diversified firms’ better leverage utilization. We find no evidence of better

leverage utilization during the 2007-2009 financial crisis and, conclude that the improvement in

the relative firm value in the most recent crisis is attributed to the reduction in agency cost.

JEL Classification: G01, G30, G32, L25

Key words: corporate diversification, recessions, relative firm value

3

I. Introduction

The effects of corporate diversification, both global and industrial, on corporate value have

been widely researched in the literature in the last several decades. Initially, the dominant view

in academic circles was that corporate diversification enhances firm value and thus benefits the

firm’s shareholders (Lewellen 1971). Early empirical research presented results which cast doubt

upon the link between diversification and value. Specifically, Lang and Stulz (1994), Berger and

Ofek (1995), Servaes (1996), and (Denis, Denis, and Yost 2002) all report the existence of a

significant discount associated with diversified firms as compared to pure play domestic one-

segment firms. Other studies, which use different methodologies, document no discount, or even

a small premium associated with diversification (see for example (Kuppuswamy and Villalonga

2010) and Campa and Kedia (2002)).

In the current study, we focus on analyzing the relative valuation of globally and industrially

diversified firms during economic downturns as compared to the single segment domestic firms.

Specifically, we examine periods of recessions, as defined by NBER (National Bureau of

Economic Research), and a period of one year following the recessions (recovery) to identify the

change in the relative value of the firm during such periods. We test the hypothesis that the

relative value of a diversified firm increases during a recessionary period due to the ability of

diversified firms to access broader capital markets, decrease in the agency cost, and more

efficient internal capital allocation during periods of difficult macroeconomic conditions.

Using a sample of quarterly data from 1999 to 2011, we document a significant increase in

the relative firm value during recessions for diversified firms that engage in global and both

global and industrial types of diversification. The improvement in the relative value is both

statistically and economically significant with the relative value of a global firm increasing by

almost 7% and a company that engages in both global and industrial diversification by over 8%

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on average. Furthermore, we demonstrate that the improvement in the relative firm value is only

a temporary phenomenon. During periods of recovery, the relative values of diversified firms

converge back to the pre-recession equilibrium.1

We find significant evidence to support the hypothesis that diversified firms utilized their

superior ability to access global financial markets during the 2001 crisis and attribute the

improvement in the relative valuation to it. On the other hand, relative leverage of diversified

firms is reduced slightly during the most recent financial crisis. These findings suggest that the

improvement in the relative valuation observed in Q4-2007 – Q1-2009 period are associated with

significant reduction in agency cost and better internal capital utilization by diversified firms.

We recognize that observed improvement in the relative valuation may be driven by either

the conglomerate or the single segment firm side. First, the value of the diversified firm during

crisis may improve. Second, the value the pure play firm may be reduced during recessions. For

this reason, we refer to the observed phenomenon as a change in the relative valuation of

diversified firms throughout this paper.

The current study contributes to the existing research, on the topic of firm diversification, in

a number of ways. First, we document that relative firm valuation, for two of three firm

diversification types, improves significantly during periods of recession. Second, we show that

the improvement in the relative value of a diversified firm is not unique to the 2007-2009 GFC

1 The relative value for firms involved in both global and industrial diversification converges

back to the equilibrium for both crises examined. The relative value for globally diversified firms

converges to equilibrium following the 2001 recession, but stays higher than during normal

economic conditions following the 2007-2009 financial crisis.

5

(Global Financial Crisis).2 Third, we show that the reasons, for the observed reduction in

relative discount, vary from one crisis to another. Fourth, we document that the improved

valuation is not sustained in the recovery period and converges back to its pre-recession

equilibrium

The remainder of the paper is organized in the following way: Section II reviews the existing

literature, Section III covers the main hypothesis, Section IV explains the data collection process

and methodology of the study, Section V discusses the results of the study, Section VI concludes.

II. Literature Review

A brief review of the extant literature is presented. We focus on the most relevant theoretical

literature as well as recent empirical studies on the topic. While there are numerous empirical

papers addressing the diversification firm value question, few consider the impact of recession

upon the change in the relative discount (premium) in value for diversified firms. For a more

comprehensive summation of the literature one can refer to Erdorf et al. (2013).

Under an assumption of perfect capital markets, diversification does not increase shareholder

wealth. Therefore, diversification is irrelevant to the firm [see Modigliani and Miller (1958)].

Under perfect capital markets investors are able to diversify their own portfolio. Rational

investors operating under certainty in perfect capital markets should neither reward nor punish

firms for choosing to diversify.

Agency theory, which claims that managers have a vested interest in diversifying their firms

to increase their own power, enrich themselves, reduce their own employment risk, is one of the

explanations offered for the existence of a difference in the value of diversified firms relative to

2 Kupuswamy and Villalonga (2010) focus their research on the 2007-2009 crisis arguing that the

origination of this crisis in consumer finance makes it unique for the purposes of such study.

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single-segment firms.3 Under agency theory it is expected that diversification has a negative

effect on the value of a firm. Hoechle et al (2012) show the magnitude of the diversification

discount is amplified for firms with weaker corporate governance. In their attempt to explain

diversification discount Best, Hodges and Lin (2004) look at information asymmetry. They

document a positive relationship between information asymmetry and corporate diversification,

but still observe presence of discount for diversified firms will all levels of information

asymmetry.

The theory of internal capital markets offers another explanation for why diversified firms

differ in value from non-diversified firms. Specifically, this theory states that the firm can

subsidize divisions with internal capital, and, as a result, gain a comparative advantage over

firms that use only external finance to fund their operations. Assuming the internal capital is

distributed efficiently, the theory suggests that diversified firms should be valued at a premium

to their single segment competitors.4 Debt co-insurance effect under which diversification leads

to higher debt capacity and a lower cost of capital follows from the theory of internal capital

markets [see Lewellen (1971)].

3 Jensen and Murphy (1990) , Jensen (1986), Amihud and Lev (1981), Schleifer and Vishny

(1989), Dennis, Denis, and Sarin (1997), Aggarwal and Samwick (2003) present empire

building, managerial hubris, managerial overconfidence, and executives’ pursuit of insurance to

protect their positions as the reason for diversification and the cause for the discount associated

with diversification.

4 If the internal capital is not allocated efficiently, which is in line with higher agency cost in

diversified firms, a discount is expected.

7

A third theory, value maximization model, suggests that firms start diversifying when they

become relatively unproductive in their core business [see Gomes and Livdan (2004)]. Corporate

refocusing theory assumes that diversified firms trade at a discount to what the individual value

of a segment would be [see Krishnaswami and Subramaniam (1999), Schlingmann, Stulz, and

Walkling (2002)]. Additionally, firms may choose to take advantage of the economies of scale

from operating in various countries and industries [see Teece (1980)]. Value of diversification

could also be greater if the firm possesses unique intangible assets. Multinational firms can take

advantage of tax code differentials between different countries by shifting profits to countries

with lower tax burdens [see Desai, Foley, and Hines (2004)]. The above theories apply to both

industrial and global diversification, but may have off-setting effects on the value of the firm.

For instance, the debt co-insurance effect will likely be more pronounced for firms involved in

global diversification, as such firms have better access to global financial markets. Alternatively,

firms involved in industrial and both global and industrial diversification may be more inclined

to experience greater agency problems due to their involvement in various, possibly unrelated,

lines of business, or due to more complex management structure [see (Duchin and Sosyura

2013).

Hann et al. (2013) find that diversified firms enjoy a significantly lower cost of capital,

which suggests that during times of financial distress they may also have easier access to capital

and therefore exhibit a premium to their normal relative valuation to non-diversified firms.

Further, Rajan et al. (2000) and Scharfstein and Stein (2000) suggest that during a financial crisis

the competition between different segments of a diversified firm for capital from the firm’s

headquarters increases substantially, and top management is more effective in selecting the most

promising projects (segments) to finance, which enhances the value of the firm.

8

We focus our study on the two recessions which took place in the XXI century. Both of these

recessions were long and severe. However, distinct characteristics define both of these

recessionary periods. These differences allow for a unique opportunity to examine the causes of

improvement in relative valuation of the firm, in recessionary periods. The dot-com crisis of

2001, which was caused by a valuation bubble of high tech companies generated a significant

loss of shareholder wealth around the globe and the US especially. This recession did not

originate from the financial sector and had a moderate effect on the capital markets. In contrast

the GFC of 2007, triggered by the subprime mortgage market collapse in the US had a dramatic

affect on the capital markets around the globe, effectively freezing the market for corporate

borrowing for a prolonged period. Extant literature has commented that the GFC had sharp

supply side effects within the credit market, while the recession in the early part of the decade

was a more typical demand driven recession [see (Duchin 2010)].

In examining the aforementioned theories during recessionary and recovery periods we

utilize both the relative firm value and the relative leverage as our dependent variables. The use

of the relative leverage variable allows us to clearly identify the change in the relative value of

the firm with either the leverage-related or the agency-related theories. The motivation for this

research comes from the fact that there is currently a lack of understanding of the effect of crisis

on the firm relative valuation. To the best of our knowledge, there is only one study that focuses

exclusively on analyzing the change in a diversification discount during the GFC [see

Kuppuswamy and Villalonga (2010)]. Unlike Kuppuswamy and Villalonga (2010), the authors

draw upon the theoretical framework of Lambrecht and Myers (2012) and use both leverage net

debt (net leverage) to better analyze leverage effects on firm diversification. Use of both

methodologies reveals no evidence of relatively greater external financing utilization by

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diversified firms. Additionally, this study focuses on a significantly broader sample, which

includes two crises, and presents evidence as to the origin of the change in the relative firm

valuation. The study is the first of its kind to show that the drivers behind the improvement in the

relative valuation of diversified firms vary from one recession to another.

III. Hypotheses

Consistent with previous empirical work5, we expect the observed firm value discount to be

the greatest for the firms involved in both global and industrial diversification. Furthermore,

following Kuppuswamy & Villalonga (2010), we expect the relative valuation of diversified

firms to increase significantly during times of recession. During periods of increased financial

constraint, diversified firms should enjoy easier access to capital and the managers should

allocate such capital more efficiently, therefore providing for an improvement in relative firm

valuation.

Hypothesis 1: During recessions relative valuation of diversified firms increases significantly.

It has been shown in prior research that there is a positive correlation between access to

capital, as measured by the degree of leverage, and the degree of diversification [see Berger and

Ofek (1995)]. This is consistent with the hypothesis put forth by Lewellen (1971), which states

that due to the imperfect correlation between diversified businesses’ cash flows’ reduction in the

default risk is observed, therefore providing diversified firms with higher debt capacity. We

hypothesize that diversified firms tend to be more heavily leveraged as compared to their single

segment domestic peers. Furthermore, during recessionary periods, diversified firms effectively

utilize their superior ability to raise capital and become even more leveraged relative to their

single segment peers.

5For example Denis, Denis and Yost (2002)

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Hypothesis 2: During recessions relative leverage of diversified firms increases significantly.

The two proposed hypotheses allow us to draw conclusions on the key question of this

research: Is the observed improvement in the relative valuation of diversified firms a product of

better access to capital or is it a result of managers making better decisions under difficult

economic conditions?

IV. Data Selection and Methodology

There are several empirical approaches to determining the value of diversification: (1) cross-

sectional studies which compare the value of individual segments of a firm to the value of a pure

play domestic firm operating in the same market, (2) event studies which determine a market

reaction to announcements associated with changes in the diversification profile of a firm, (3)

investment efficiency of internal capital can be examined. The main empirical approach of this

study involves regressing dependent variables of relative firm value and relative leverage on

measures of diversification, crisis, recovery, and a number of control variables from prior

literature. We use two dependent variables that have been introduced in the previous studies: (1)

measure of the excess value of diversified firms relative to single-segment firms [see Berger and

Ofek (1995)], (2) measure of industry-adjusted leverage differential for diversified and non-

diversified firms [see Berger and Ofek, (1995), Ahn, Denis, and Denis (2006), and Kuppuswamy

and Villalonga (2010)]. Endogeneity bias is controlled for using both, the Heckman’s two-stage

regression procedure6 as well as Fixed Effects panel regression techniques.

Often U.S. firms engage in diversification activities at an industrial or global level, thereby

creating four variations on the degree and scope of diversification: non-diversified firms,

industrially diversified firms, globally diversified firms, and firms involved in both global and

6 see Campa and Kedia (2002)

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industrial diversification. In our work, we follow the sample selection methodology used in

Denis, Denis, and Yost (2002). We obtain the sample segment data from COMPUSTAT for both

industrial and globally diversified segments of US firms for years 1999-2011. Consistent with

Denis, Denis, and Yost (2002) we eliminate utility and financial service firms (SIC codes 4900-

4999 and 6000-6999), and firms that are incorporated in countries other than the United States.

Firms that belong to more than one industry and which operate internationally are placed in the

category of both industrially and globally diversified firms. Firms with international operations

that pursue one line of business are put in the globally diversified category. Firms that operate

multiple lines of business inside the U.S. are considered to be industrially diversified. Single

segment domestic firms are considered non-diversified or pure-play firms, valuations of which

are used to compute the imputed value of diversified firms.

We eliminate firm-years in which the total sum of either industrial or global segment sales is

not within one percent of the total reported firm sales for the year [consistent with Denis, Denis,

and Yost (2002)]. The quarterly data on stock prices and market capitalization are obtained from

CRSP. In order to compute imputed firm value by quarter a few assumptions were made as

quarterly values are not reported for firm segments. The ratio of the firm’s sales for a given

segment in a given fiscal year as reported in the COMPUSTAT segment files to the total firm’s

sales in a given fiscal year were used to determine the weight of sales to a given segment. This

weight was then multiplied by the reported quarterly sales figure on the COMPUSTAT segment

files by the geometric mean of the ratio of firm value to sales of the pure play competitor firms in

the same industry in the same quarter. This process is used to find the imputed value of a given

firm’s segment. Schwetzler and Rudolph (2011) also show that conglomerate discount

(premium) is affected by the choice of multiplier aggregation method. Previous studies use

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median ratios to calculate firm value. The use of geometric mean to aggregate industry

multipliers rather than the median yields more consistent results and decreases the observed

degree of a diversification discount, as illustrated in Schwetzler and Rudolph (2011). Other

control variables similar to the Berger and Ofek (1995) or Denis, Denis and Yost (2002) were

used, the only adjustment made to accommodate quarterly data concerns EBIT (earnings before

interest taxes) to sales ratio. Since EBIT is not reported quarterly to the COMPUSTAT tapes the

authors made the assumption that the annual reported EBIT for a firm’s given fiscal year

occurred equally over the four quarters (in other words reported annual EBIT divided by four =

quarterly EBIT).

We match the segment firm years with pure play domestic firms based on three-digit SIC

code. The resulting sample is described in Table 1.

<Table 1 here>

Table 1 reports the number of firm quarters and the firm-specific characteristics of firms

included in the sample. In line with expectations, the non-diversified firms are the smallest firms

with the mean firm size of $1.42 bil and the both, globally and industriallydiversified firms,

represent the largest firms with the mean size of $7.99 bil. It is also noteworthy that non-

diversified firms have the highest capital expenditure to sales, EBIT to sales and Tobin’s-Q

ratios. Single segment firms also hold less long term debt than diversified firms. As a note all of

the market and book numbers used in computing the variables of interest as well as controls were

adjusted for inflation to reflect first quarter 2005 (Q1 – 2005) values.

Schwetzler and Rudolph (2012) show that the widely used method of calculating excess

values implemented by Berger and Ofek (1995) can be modified to produce more consistent

13

results by computing enterprise value rather than firm value.7 According to Duchin (2010),

conglomerates hold significantly less cash than single industry firms, and not accounting for

different cash holdings may significantly underestimate conglomerate performance. For this

reason, we use the enterprise value for all calculations in the current study. We compute the

percentage difference between the enterprise value of total capital (market value of equity plus

book value of total assets minus book value of common equity minus cash) [see Schwetzler and

Rudolph (2012)], and the sum of the imputed values of its segments as stand-alone domestic

firms. The sum of the imputed values of all segments within a firm is the imputed value of the

firm as a whole. As opposed to Denis, Denis and Yost (2002) who drop value ratios in excess of

four or less than one-quarter, we winsorize all dependent variables of interest (enterprise value,

leverage and net leverage) to 1% percent in both tails. The log of the ratio of the firm’s actual

value and the imputed value measures excess firm value and captures the amount of a discount

(premium) due to diversification [see Berger and Ofek (1995), Denis, Denis and Yost (2002), as

well as Schwetzler and Rudolph (2012)].

We apply two calculation methodologies to test Hypothesis 2. First, as in Kuppuswamy and

Villalonga (2010), we calculate the industry-adjusted excess leverage, which is the difference of

firm’s actual leverage and its imputed leverage in each time period. We then perform cross-

sectional regression analysis of excess leverage on the firm specific characteristics and the

interaction terms of the state of the economy and the diversification category that the firm falls

into. This methodology allows us to measure relative changes in leverage utilization between

7 The difference in the calculation of firm value (market value of equity plus total debt) versus

the enterprise value (market value of equity plus net debt, where cash is treated as negative debt)

is in subtracting cash from the firm value calculation.

14

diversified and non-diversified firms, allowing us to surmise the reasons driving the change in

the magnitude of the observed diversification discount in recessionary economic conditions.

Second, we perform the procedures described above using the excess net leverage as the

dependent variable in the cross sectional regression.

Lambrecht and Myers (2012) develop a theoretical model relating firms’ payout ratios and

adjustment speeds to changes in cash flow streams. Their model has several implications

relating to financing policy and is built upon the idea that sources and uses of cash must equal.

They propose that change in debt is the buffer managers employ to smooth payouts in order

extract the highest personal rents possible. Most importantly for the purposes of this paper

Lambrecht and Myers identify that it is in fact net debt (debt less cash) which is most important.

Furthermore, another implication of the model is that risk adverse managers will tend to

underinvest in order to save cash for unexpected shocks (recessions). Coupled with the fact that

Duchin (2010), documents that diversified firms hold more cash on a relative basis than do pure

play firms causes the authors to believe that it is in fact net debt which needs to be explored.

We use the control variables used by Denis, Denis and Yost (2002) including the relative

market value of total capital (RMVTC), the relative ratio of long term debt to the market value of

total capital (RLTDTC), the relative ratio of capital expenditure to sales (RCES), and the relative

ration of EBIT to sales (RES), we include the relative Tobin’s-Q (RQ) as control for the growth

opportunities of the firm.8 To control for endogeneity bias we include the estimates from the

probit model, the inverse Mills ratio, in all specifications of the model (IMR – industrial, IMR –

global, IMR – both). The variables and the results used to estimate the first stage of the

Heckman’s two stage regression are reported in Table 2. To determine the IMR we follow a

8see Ahn, Denis, and Denis (2006).

15

methodology similar to one employed by Campa and Keida (2002), this same methodology was

employed by Tong (2011). To capture the essence of Campa and Keida we use a lag of four and

eight quarters (one and two calendar years) in the control variables to ensure an appropriate

amount of time to pass to capture managements’ choice to diversify.

<Table 2 here>

Alternatively, we employ panel regression technique to control for endogeneity and insure

robustness of observed results.

V. Results

1. Univariate Results

First, we perform univariate tests of the log of the ratio of the excess value and excess net

leverage on dummy variables for various types of diversification to establish presence of a

diversification discount or premium. Figure I illustrates the results of the univariate tests. The

univariate results are consistent with those of Denis, Denis, and Yost (2002) in both, their

magnitude and direction for all three types of diversification examined.

<Figure I here>

Visual inspection of the figure reveals an inverse relationship between the firm value and the

leverage. Additionally, on a univariate basis, it does appear that the relative firm value improves

during the recessionary periods (2001, Q4 2007 – Q1 2009)

2. Multivariate Results

We report the results of the multivariate regressions examining the effect of diversification

on relative firm value in Table 3. All of the signs for the control variables are consistent with

expectations and previous literature. Specifications (1) and (2) in both, pooled and panel

regressions, reveal presence of a significant discount associated with all types of diversification.

16

Consistent with previous literature, we document that the highest magnitude of discount is

observed in firms that engage in both industrial and global types of diversification.

<Table 3 here>

In specifications (3) and (4) we control for recessionary economic conditions. The negative

significant coefficient for the crisis variable observed in both specifications suggests that,

overall, firm value decreases by about 4% during recessions for all firms. Further results reveal a

significant reduction in the magnitude of the observed discount for firms engaged in global and

both, global and industrial, diversification. Notably, industrially diversified firms do not exhibit

an improvement in the relative firm valuation. This finding is consistent with the better leverage

utilization hypothesis. Arguably, unlike globally and both globally and industrially diversified

firms, industrially diversified firms have access to similar capital markets as do domestic non-

diversified firms, and therefore one should not expect a significant improvement in such firms’

relative valuation. Specification (4) in both pooled and panel regressions reveals that the

observed reduction in discount is only a temporary phenomenon, which disappears when the

economy shows signs of recovery.

The economic relevance of the findings can be illustrated using a simple example. Let us

assume that a firm engaged in both global and industrial diversification has an imputed value $10

bil. Based on our findings, this firm’s market value under normal economic conditions would be

$5.97 bil. The observed reduction in the discount implies a value of such firm to be $6.47 bil

during recessionary period. This change represents an 8.4 percent improvement in firm’s

valuation.

Ahn, Denis, and Denis (2006) propose the use of industry-adjusted leverage, computed as the

difference between firm’s actual leverage and its imputed leverage in each time period to

17

measure the difference in leverage profiles between diversified and non-diversified firms. A

firm’s imputed leverage is the asset-weighted average of its segments’ imputed leverage ratios,

which are the product of the segments’ most recent annual assets and the geometric mean

leverage of single-segment firms in the same industry and year. The leverage ratio of single-

segment firms in the industry is defined as gross book leverage, which is the ratio of total debt to

total book assets at the end of each period.

<Table 4 here>

The results displayed in Table 4 show support to the notion that diversified firms exhibit

higher leverage utilization relative to their single segment competitors. Contrary to Hypothesis 2,

we do not find diversified firms to utilize more external financing during recessionary periods. In

fact, we observe a small economically, but statistically significant reduction in the relative

leverage utilization by industrially diversified firms. These findings lend support to the better

internal capital allocation, or reduction in agency costs, during recessions. The excess leverage

results also show that during periods of recovery globally and both, globally and industrially

diversified firms do increase their relative leverage. This observation suggest that multinational

firms do have an ability to utilize their superior access to external financing, but only do so when

the economy starts to recover.

<Table 5 here>

The use of excess net debt, as the proxy for leverage utilization, reveals that, diversified firms

do utilize relatively more leverage. It also shows that there is no relative increase in net leverage

utilization for the periods of recessions. Once again, we are able to show that during economic

recovery, diversified firms do increase their net debt, but, given the observed results, we cannot

attribute the improvement in the diversified firms’ relative value to better leverage utilization.

18

To ensure robustness and consistency of our results across the two recessions captured in our

sample, we separate the crises and perform the above tests while controlling for each recession

and recovery individually.

<Table 6 here>

Consistent with our previous findings, the value of all firms decreases during the recessions.

We confirm that the improvement in the relative value of both globally and industrially

diversified firms is a phenomenon that is observed in both recessions captured in our sample,

therefore concluding that it is not just an artifact of the GFC. It is important to note that the

behavior of the firm’s relative valuation during the recovery period differs significantly between

the 2001 and the 2007-2009 crises. The value of globally and both, globally and industrially,

diversified firms improves significantly following the 2007-2009 crisis, but it drops significantly

in 2002. These findings can be explained by the fact that the 2001 crisis did not originate from

the credit markets and did not have as much of the effect on the corporate debt markets as did

during the GFC.

<Table 7 here>

<Table 8 here>

Our analysis of the behavior of leverage under the conditions of the economic downturns

reveals a significant difference between the two recessions examined. In 2001 both globally and

globally and industrially diversified firms took advantage of their superior access to external

capital markets and increased their relative leverage significantly. The pattern observed in 2007-

2009 crisis differs significantly. Diversified firms slightly reduced their relative leverage during

the crisis. These findings allow us to draw a conclusion that, depending on the origin and the

19

severity of the crisis, both, the better leverage utilization and the improvement in the agency cost,

hypotheses have grounds in explaining the phenomenon examined in this study.

VI. Conclusion

In this study we document a significant discount associated with all types diversification in

1999-2011 period. The deepest discount is exhibited by firms engaged in both global and

industrial diversification, followed by firms that pursue industrial diversification. The observed

discount becomes less pronounced during recessionary periods. In weak economic conditions

investors appear to recognize the benefits of global and both, industrial and global,

diversification. We show an 8.4 percent increase in the relative value of globally and industrially

diversified firms and about a 7 percent increase in the value of globally diversified firms during a

recession. We also show that the improvement in the diversification discount is reversed for

firms involved in both global and industrial diversification following the 2001 recession and for

the firms involved in both types of diversification following the GFC.

We demonstrate that diversified firms, on average, carry significantly more leverage. The

relative leverage is increased further following the 2001 recession. Since the 2001 recession had

a moderate effect on the capital markets, we attribute the observed improvement in the relative

valuation to diversified firms’ utilization of better access to global capital markets during the

recession. We do not find evidence of an increase in relative leverage for diversified firms during

the GFC. Since GFC had a tremendous effect on the capital markets and effectively froze the

corporate debt marketplace, we attribute the improvement in the relative valuation of diversified

firms to better internal capital utilization and reduction in agency costs associated with

diversification. For this reason, we conclude that although diversification can be effectively used

as a hedge against economic downturns, the reasons behind the observed improvement in the

relative valuation of diversified firms vary depending on specific characteristics of recessions.

20

Our findings have implications for future research, of the diversification discount (premium)

question. Even after controlling for endogeneity as well as other factors known to influence firm

value, it can be seen that the relative firm value of a diversified firm does not exhibit a uniform

pattern. There are many competing factors which have influence on the relative value of a

diversified firm and the interaction of such variables changes with time. Future research in this

area may wish to focus on dynamic models to better assess the inter-temporal nature of the

question.

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21

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22

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23

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24

Figure I. Relative enterprise value and relative net debt. This figure presents the relative enterprise value (calculated as the ratio of actual firm value and the imputed firm value) by type of

diversification and relative net debt (calculated as the ratio of the actual firm net debt [total debt-cash] and its imputed net debt)

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

-0.4

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0Q

1 2

00

1

Q4

20

01

Q3

20

02

Q2

20

03

Q1

20

04

Q4

20

04

Q3

20

05

Q2

20

06

Q1

20

07

Q4

20

07

Q3

20

08

Q2

20

09

Q1

20

10

Q4

20

10

Q3

20

11

Net

Deb

t re

lati

ve t

o p

ure

pla

y

EV r

elat

ive

to p

ure

pla

y

Relative EV - industrial Relative Net Debt - Industrial

0

0.05

0.1

0.15

0.2

0.25

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

Q1

20

01

Q4

20

01

Q3

20

02

Q2

20

03

Q1

20

04

Q4

20

04

Q3

20

05

Q2

20

06

Q1

20

07

Q4

20

07

Q3

20

08

Q2

20

09

Q1

20

10

Q4

20

10

Q3

20

11

Net

Deb

t re

lati

ve t

o p

ure

pla

y

EV r

elat

ive

to p

ure

pla

y

Relative EV - Global Relative Net Debt - Global

0

0.05

0.1

0.15

0.2

0.25

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

Q1

20

01

Q4

20

01

Q3

20

02

Q2

20

03

Q1

20

04

Q4

20

04

Q3

20

05

Q2

20

06

Q1

20

07

Q4

20

07

Q3

20

08

Q2

20

09

Q1

20

10

Q4

20

10

Q3

20

11

Net

Deb

t re

lati

ve t

o p

ure

pla

y

EV r

elat

ive

to p

ure

pla

y

Relative EV - Global Relative Net Debt - Global

25

Table 1. Sample characteristics

.

Note: The table reports sample characteristics based on a three digit SIC code matching

Diversification

TypeN Size

N of

segments

LT Debt-

to-

Assets

Capex-to-

Sales

EBIT-to-

SalesTobin's-Q

Not Diversified 34,399 $1.42 bil 1 0.17 0.23 0.19 2.29

Industrially

Diversified12,905 $3.10 bil 2.67 0.26 0.12 0.15 1.63

Globally

Diversified41,692 $3.30 bil 1 0.14 0.1 0.16 2.14

Both industrially

and globally

diversified

24,892 $7.99 bil 2.93 0.22 0.07 0.13 1.5

26

Table 2. Inverse Mill’s Ratio estimation

Note: the table presents the results for estimation of the inverse Mills ratio, which is later used for estimation of the relative excess

value. The procedure is also known as the Heckman’s two-stage correction and is designed to control for the endogeneity bias. An

estimation of a probit model utilizing dummy variables for the type of diversification as dependent variables and a set of independent

variables is performed. The independent variables are as follows: Size is natural log of total book assets, Size(t-4) and Size(t-8) is the

natural log of book assets lagged by four and eight quarters respectively; EBIT is one-quarter of the annual fiscal EBIT reported to the

annual COMPUSTAT tapes, EBIT (t-4) and EBIT (t-8) is the four and eight quarter lag of EBIT respectively; CAPEX is the quarterly

capital expenditure for the firm, CAPEX (t-4) and CAPEX (t-8) is the four and eight quarters lag of CAPEX respectively; SP dummy

is an indicator variable which equals one if the firm is an S&P 500 member firm in that quarter, Industry Sales Pct is the percentage of

sales in industry by three digit SIC by firms of that diversification type (industrially diversified, globally diversified or both

industrially and globally diversified); Divers. Pct in Industry is the number of firms of a particular diversification type industrially,

globally or both divided by the total number of firms in the industry as defined by three digit SIC code; CPI growth is the year of year

growth of GDP; GDP gr (t-1) is the one year lag of GDP.

Industrial Global Both

Intercept -1.21672 *** -1.372 *** -1.9631 ***

-9.86 -14.85 -19.08

Size 0.017304 0.0061 0.18319 ***

0.77 0.38 9.24

Size (t-4) 0.017561 0.01583 -0.0516 *

0.56 0.71 -1.87

Size (t-8) -0.08021 *** 0.01386 0.07358 ***

-4.00 0.96 4.16

EBIT -0.85004 *** 1.0427 -0.2917 *

-4.28 8.41 -1.76

EBIT (t-4) -0.10424 0.20592 -0.0658

-0.46 1.45 -0.34

EBIT (t-8) -0.33487 * 0.66798 *** 0.30679 **

-1.78 5.69 2.07

CAPEX 0.558731 -1.5084 *** -1.2274 ***

1.63 -4.96 -3.27

CAPEX (t-4) 1.069324 *** -0.9401 *** -1.8153 ***

3.25 -3.18 -5.00

CAPEX (t-8) 0.737843 *** -1.0305 *** -2.3689 ***

2.59 -3.96 -7.33

SP dummy -0.29554 *** -0.1727 *** 0.15727 ***

-10.55 -9.58 8.66

Industry Sales Pct 1.124893 *** 1.37623 *** 0.87304 ***

33.33 64.34 40.83

Divers. Pct in Industry 4.356641 *** 2.26928 *** 3.02398 ***

78.43 82.56 83.02

CPI growth 0.398875 -0.2173 -0.1163

1.13 -0.85 -0.41

GDP gr (t-1) 0.000 0.000 *** 0.000 ***

-1.61 -3.04 -9.19

N 95102 95102 95102

Pseudo-R_square 0.2887 0.1682 0.247

Diversification Type

27

Table 3. Excess Value

Dependent Variable (1) (2) (3) (4) (1) (2) (3) (4)

Intercept 0.0498 *** -0.1558 *** -0.1454 *** -0.1504 ***

(5.21) (-20.12) ( -17.75) (-17.29)

Industrially -0.2334 *** -0.1318 *** -0.1366 *** -0.1352 *** -0.0960 *** -0.0894 *** -0.0939 *** -0.0970 ***

(-18.1) (-12.91) (-12.04) (-10.67) (-2.85) (-3.22) (-3.32) (-3.4)

Globally -0.1574 *** -0.0858 *** -0.0942 *** -0.0952 *** -0.1179 *** -0.0801 *** -0.0864 *** -0.0915 ***

(-17.96) (-12.22) (-12.08) (-10.94) (-3.63) (-3.52) (-3.79) (-4.00)

Both -0.3876 *** -0.2475 *** -0.2593 *** -0.2584 *** -0.2107 *** -0.1536 *** -0.1640 *** -0.1707 ***

(-36.01) (-28.71) (-27.44) (-24.71) (-5.35) (-4.79) (-5.07) (-5.26)

Recession -0.0444 *** -0.0392 *** -0.0282 *** -0.0236 **

(-3.93) (-3.36) (-2.90) (-2.23)

Recession - Industrially 0.0197 0.0183 0.0217 0.0247

(0.9) (0.81) (1.07) (1.13)

Recession - Global 0.0372 ** 0.0381 ** 0.0305 ** 0.0351 **

(2.48) (2.46) (2.30) (2.42)

Recession - Both 0.0518 *** 0.0513 *** 0.0497 *** 0.0547 ***

(3.07) (2.94) (3.14) (3.16)

Recovery 0.0228 * 0.0227 **

(1.77) (2.13)

Recovery - Industrially -0.0036 0.0145

(-0.19) (0.64)

Recovery - Global 0.0045 0.0208

(0.26) (1.40)

Recovery - Both -0.0061 0.0223

(-0.25) (1.26)

RMVTC 0.1062 *** 0.1062 *** 0.1064 *** 0.2505 *** 0.2505 *** 0.2515 ***

(56.76) (56.78) (56.85) (32.44) (32.44) (32.49)

RLTDTC -0.2027 *** -0.2024 *** -0.2030 *** -0.2170 *** -0.2176 *** -0.2204 ***

(-14.09) (-14.06) (-14.1) (-5.93) (-5.94) (-6.01)

RCES 0.4404 *** 0.4403 *** 0.4402 *** 0.2503 *** 0.2502 *** 0.2502 ***

(43.05) (43.05) (43.04) (14.92) (14.93) (14.92)

RES -0.0609 *** -0.0609 *** -0.0609 *** -0.0536 *** -0.0537 *** -0.0536 ***

(-52.83) (-52.84) (-52.82) (-18.14) (-18.15) (-18.14)

RQ 0.2971 *** 0.2971 *** 0.2970 *** 0.1785 *** 0.1783 *** 0.1782 ***

(158.64) (158.5) (158.4) (42.54) (42.48) (42.57)

IMR - Industrial 0.0838 *** 0.2098 *** 0.2102 *** 0.2105 ***

(3.62) (11.48) (11.5) (11.52)

IMR - Global -0.3366 *** -0.2736 *** -0.2745 *** -0.2742 ***

(-19.38) (-19.82) (-19.89) (-19.86)

IMR - Both -0.0356 ** -0.0761 *** -0.0765 *** -0.0786 ***

(-2.04) (-4.99) (-5.01) (-5.15)

Adj R-squared 0.0305 0.412 0.4121 0.4122 0.029 0.3115 0.3114 0.3112

N 79029 76284 76284 76284 113343 105831 105831 105831

Excess Value

Panel RegressionPooled Regression

28

Note: The table reports the results for an OLS regression (Pooled Regression) with relative excess value of a firm used as a dependent

variable. The independent variables are as follows: Industrially = 1 if firm is engaged in the industrial type of diversification in the

U.S.; Globally = 1 if the firm is involved in a single line of business, but reports existence of units in the U.S. and at least one other

country; Both = 1 if the firm is involved in both global and industrial types of diversification (reports multiple lines of business and

operates in the U.S. and at least one more country); Recession = 1 if the observation falls on 2001 or Q4 2007 – Q12009 (recessions

defined by NBER); next three variables are interaction terms of the Recession variable and the diversification variables described

above; Recovery = 1 if the observation falls inside one year following the recession; next three variables are interaction terms of the

Recovery variable and the diversification variables described above. The following control variables are consistent with previous

literature [see Denis et al. (2002)] RMVTC = relative market value of total capital, RLTDTC = relative long term debt to total capital;

RCES relative capital expenditure to sales; RES = relative EBIT to sales; RQ = relative Tobin’s Q. The remaining control variables

(IMR – Industrial, IMR – Global, IMR – Both) are discussed in Table 2 and are included to control for endogeneity bias. Panel

regression technique is performed as an alternative to control for endogeneity bias. The results are reported in this table under Panel

Regression.

29

Table 4. Excess Leverage


Intercept 0.0214 *** 0.0314 *** 0.0299 *** 0.0321 **

(10.48) ( 15.15) (13.64) (13.80)

Industrially 0.0155 *** 0.0106 *** 0.0132 *** 0.0131 *** 0.0115 0.0044 0.0055 0.0057

(5.61) (3.87) (4.35) (3.85) (1.16) (0.43) (0.54) (0.56)

Globally 0.0205 *** 0.0067 *** 0.0060 *** 0.0030 0.0074 -0.0007 -0.0004 -0.0007

(10.94) (3.57) (2.85) (1.29) (0.94) (-0.09) (-0.05) (-0.09)

Both 0.0169 *** 0.0026 0.0035 -0.0021 0.0102 0.0000 0.0001 -0.0034

(7.32) (1.14) (1.38) (-0.74) (1.06) (0.00) (0.01) (-0.34)

Recession 0.0062 ** 0.0040 0.0067 ** 0.0062 **

(2.04) (1.28) (2.41) (2.03)

Recession - Industrially -0.0117 ** -0.0116 * -0.0056 -0.0058

(-2.00) ( -1.91) (-0.98) (-0.91)

Recession - Global 0.0033 0.0063 -0.0020 -0.0016

(0.82) (1.51) (-0.53) (-0.39)

Recession - Both -0.0039 0.0017 -0.0011 0.0025

(-0.87) (0.36) (-0.27) (0.53)

Recovery -0.0095 *** -0.0020

(-2.76) (-0.67)

Recovery - Industrially 0.0007 -0.0009

(0.10) (-0.14)

Recovery - Global 0.0130 *** 0.0018

(2.84) (0.45)

Recovery - Both 0.0238 *** 0.0166 ***

(4.64) (3.61)

RMVTC 0.0299 *** 0.0299 *** 0.0299 *** 0.0235 *** 0.0235 *** 0.0236 ***

(60.12) (60.09) (60.13) (10.97) (10.93) (10.93)

RCES 0.0228 *** 0.0229 *** 0.0230 *** -0.0110 *** -0.0110 *** -0.0109 ***

(8.32) (8.35) (8.38) (-2.67) (-2.65) (-2.64)

RES -0.0033 *** -0.0033 *** -0.0033 *** -0.0007 -0.0007 -0.0007

(-10.69) (-10.69) (-10.64) (-1.08) (-1.04) (-1.04)

RQ -0.0161 *** -0.0161 *** -0.0162 *** -0.0109 *** -0.0109 *** -0.0110 ***

(-33.55) (-33.64) (-33.72) (-11.29) (-11.29) (-11.33)

IMR - Industrial -0.0474 *** -0.0225 *** -0.0224 *** -0.0224 ***

(-9.57) (-4.61) (-4.58) (-4.58)

IMR - Global 0.0670 *** 0.0516 *** 0.0519 *** 0.0519 ***

(18.03) (13.97) (14.05) (14.06)

IMR - Both 0.0657 *** -0.0403 *** -0.0402 *** -0.0405 ***

(17.65) (-9.86) (-9.85) (-9.92)

Adj R-squared 0.019 0.0717 0.0719 0.0722 0.0044 0.0581 0.0581 0.0582

N 79223 76284 76284 76284 113886 105831 105831 105831

Excess Leverage

Pooled Regression Panel Regression

30

Note: The table reports the results for an OLS regression (Pooled Regression) with relative excess leverage of a firm used as a

dependent variable. The independent variables are as follows: Industrially = 1 if firm is engaged in the industrial type of

diversification in the U.S.; Globally = 1 if the firm is involved in a single line of business, but reports existence of units in the U.S. and

at least one other country; Both = 1 if the firm is involved in both global and industrial types of diversification (reports multiple lines

of business and operates in the U.S. and at least one more country); Recession = 1 if the observation falls on 2001 or Q4 2007 –

Q12009 (recessions defined by NBER); next three variables are interaction terms of the Recession variable and the diversification

variables described above; Recovery = 1 if the observation falls inside one year following the recession; next three variables are

interaction terms of the Recovery variable and the diversification variables described above. The following control variables are

consistent with previous literature [see Denis et al. (2002)] RMVTC = relative market value of total capital; RCES relative capital

expenditure to sales; RES = relative EBIT to sales; RQ = relative Tobin’s Q. The remaining control variables (IMR – Industrial, IMR

– Global, IMR – Both) are discussed in Table 2 and are included to control for endogeneity bias. Panel regression technique is

performed as an alternative to control for endogeneity bias. The results are reported in this table under Panel Regression.

31

Table 5. Excess Net Leverage


Intercept -0.0236 *** 0.0203 *** 0.0194 *** 0.0212 ***

(-6.99) (6.08) (5.51) (5.66)

Industrially 0.0646 *** 0.0443 *** 0.0480 *** 0.0479 *** 0.0301 ** 0.0205 0.0212 0.0208

(14.18) (10.06) (9.81) (8.76) (2.15) (1.43) (1.48) (1.46)

Globally 0.0681 *** 0.0274 *** 0.0265 *** 0.0232 *** 0.0468 *** 0.0322 *** 0.0331 *** 0.0325 ***

(22.01) (9.06) (7.88) (6.18) (3.92) (2.7) (2.78) (2.73)

Both 0.0998 *** 0.0550 *** 0.0538 *** 0.0446 *** 0.0480 *** 0.0254 * 0.0231 0.0167

(26.25) (14.78) (13.2) (9.89) (3.31) (1.72) (1.57) (1.13)

Recession 0.0034 0.0017 0.0006 0.0010

(0.69) (0.34) (0.13) (0.22)

Recession - Industrially -0.0166 * -0.0165 * -0.0036 -0.0034

(-1.76) (-1.69) (-0.44) (-0.37)

Receccion - Global 0.0041 0.0074 -0.0042 -0.0037

(0.64) (1.11) (-0.72) (-0.59)

Recession - Both 0.0049 0.0143 * 0.0110 * 0.0171 **

(0.67) (1.89) (1.74) (2.46)

Recovery -0.0073 0.0023

(-1.31) (0.51)

Recovery - Industrially 0.0006 0.0012

(0.05) (0.13)

Recovery - Global 0.0145 ** 0.0024

(1.97) (0.37)

Recovery - Both 0.0391 *** 0.0281 ***

(4.74) (3.95)

RMVTC 0.0538 *** 0.0537 *** 0.0538 *** 0.0302 *** 0.0302 *** 0.0305 ***

(67.16) (67.14) (67.22) (9.5) (9.48) (9.55)

RCES 0.0439 *** 0.0440 *** 0.0441 *** -0.0233 *** -0.0232 *** -0.0232 ***

(9.96) (9.97) (10.00) (-3.58) (-3.57) (-3.57)

RES 0.0063 *** 0.0063 *** 0.0063 *** 0.0035 *** 0.0036 *** 0.0036 ***

(12.67) (12.67) (12.72) (3.12) (3.12) (3.13)

RQ -0.0531 *** -0.0532 *** -0.0533 *** -0.0259 *** -0.0259 *** -0.0260 ***

(-68.81) (-68.85) (-68.96) (-16.38) (-16.39) (-16.43)

IMR - Industrial -0.1174 -0.0822 *** -0.0819 *** -0.0818 ***

(-14.36) (-10.42) (-10.40) (-10.37)

IMR - Global 0.1322 0.0939 *** 0.0942 *** 0.0943 ***

(21.55) (15.79) (15.82) (15.84)

IMR - Both 0.1751 -0.0422 *** -0.0422 *** -0.0433 ***

(28.46) (-6.42) (-6.41) (-6.57)

Adj R-squared 0.0546 0.1495 0.1496 0.1499 0.0311 0.1388 0.1388 0.1387

N 79223 76284 76284 76284 113886 105831 105831 105831

Excess Net Leverage

Pooled Regression Panel Regression

32

Note: The table reports the results for an OLS regression (Pooled Regression) with relative excess net leverage of a firm used as a




of business and operates in the U.S. and at least one more country); Recession = 1 if the observation falls on 2001 or Q4 2007 –

Q12009 (recessions defined by NBER); next three variables are interaction terms of the Recession variable and the diversification

variables described above; Recovery = 1 if the observation falls inside one year following the recession; next three variables are

interaction terms of the Recovery variable and the diversification variables described above. The following control variables are

consistent with previous literature [see Denis et al. (2002)] RMVTC = relative market value of total capital; RCES relative capital




33

Table 6. Excess Value – recessions separated

Note: The table reports the results for an OLS regression (Pooled Regression) with relative excess value of a firm used as a dependent

variable. The independent variables are as follows: Industrially = 1 if firm is engaged in the industrial type of diversification in the

U.S.; Globally = 1 if the firm is involved in a single line of business, but reports existence of units in the U.S. and at least one other

country; Both = 1 if the firm is involved in both global and industrial types of diversification (reports multiple lines of business and

operates in the U.S. and at least one more country); Recession 1 = 1 if the observation is in year 2001; Recession 2 = 1 if the

observation falls in Q4 2007 – Q12009; next six variables are interaction terms of the Recession variable and the diversification

variables described above; Recovery 1 = 1 if the observation falls inside one year following the recession of 2001; Recovery 2 = 1 if

the observation falls inside one year following the GFC; next six variables are interaction terms of the Recovery variable and the

diversification variables described above. The following control variables are consistent with previous literature [see Denis et al.

(2002)] RMVTC = relative market value of total capital, RLTDTC = relative long term debt to total capital; RCES relative capital




Dependent Variable

Intercept -0.150 *** Recovery 2 - Industrially -0.004 0.020

-17.26 -0.13 0.59

Industrially -0.137 *** -0.099 *** Recovery 1 - Global -0.057 ** 0.020

-10.79 -3.48 -2.36 0.91

Globally -0.095 *** -0.086 *** Recovery 2 - Global 0.052 ** 0.027

-10.87 -3.74 2.40 1.22

Both -0.259 *** -0.168 *** Recovery 1 - Both -0.045 * -0.003

-24.80 -5.19 -1.75 -0.12

Recession 1 -0.089 *** 0.003 Recovery 2 - Both 0.038 0.050 *

-4.36 0.20 1.51 1.90

Recession 2 -0.022 * -0.043 *** RMVTC 0.106 *** 0.254 ***

-1.68 -2.91 56.82 32.74

Recession 1 - Industrially 0.045 0.030 RLTDTC -0.199 *** -0.218 ***

1.20 0.88 -13.82 -5.94

Recession 2 - Industrially 0.011 0.014 RCES 0.440 *** 0.249 ***

0.42 0.45 43.06 14.87

Recession 1 - Global 0.001 0.018 RES -0.061 *** -0.054 ***

0.02 0.79 -52.78 -18.14

Recession 2 - Global 0.049 *** 0.046 *** RQ 0.297 *** 0.178 ***

2.83 2.33 158.60 42.34

Recession 1 - Both 0.061 ** 0.044 * IMR - industrial 0.214 ***

2.09 1.71 11.71

Recession 2 - Both 0.053 *** 0.060 ** IMR - global -0.278 ***

2.67 2.48 -20.14

Recovery 1 0.035 * 0.048 *** IMR - both -0.076 ***

1.93 3.27 -4.94

Recovery 2 0.013 -0.007 Adj R-squared 0.4127 0.3109

0.78 -0.43 N 76284 105831

Recovery 1 - Industrially -0.011 0.004

-0.33 0.13

Excess Value

Pooled Regression Panel Regression Pooled Regression Panel Regression

Continued

34

Table 7. Excess leverage – recessions separated

Note: The table reports the results for an OLS regression (Pooled Regression) with relative excess leverage of a firm used as a




of business and operates in the U.S. and at least one more country); Recession 1 = 1 if the observation is in year 2001; Recession 2 = 1

if the observation falls in Q4 2007 – Q12009; next six variables are interaction terms of the Recession variable and the diversification




(2002)] RMVTC = relative market value of total capital; RCES relative capital expenditure to sales; RES = relative EBIT to sales; RQ

= relative Tobin’s Q. The remaining control variables (IMR – Industrial, IMR – Global, IMR – Both) are discussed in Table 2 and are

included to control for endogeneity bias. Panel regression technique is performed as an alternative to control for endogeneity bias. The

results are reported in this table under Panel Regression.

Dependent Variable

Intercept 0.032 *** Recovery 2 - Industrially -0.005 -0.014

13.70 -0.49 -1.33

Industrially 0.013 *** 0.005 Recovery 1 - Global 0.028 *** 0.011 *

3.55 0.49 4.62 1.71

Globally 0.003 -0.002 Recovery 2 - Global 0.002 -0.008

1.24 -0.23 0.29 -1.31

Both -0.002 -0.005 Recovery 1 - Both 0.043 *** 0.038 ***

-0.70 -0.48 6.67 5.45

Recession 1 -0.001 -0.006 Recovery 2 - Both 0.003 -0.010

-0.19 -1.17 0.52 -1.49

Recession 2 0.006 0.015 *** RMVTC 0.030 *** 0.023 ***

1.62 3.26 60.20 10.72

Recession 1 - Industrially -0.007 0.012 RCES 0.023 *** -0.011 ***

-0.68 1.21 7.44 -2.57

Recession 2 - Industrially -0.013 -0.016 * RES -0.003 *** -0.001

-1.53 -1.65 -8.98 -1.07

Recession 1 - Global 0.039 *** 0.014 ** RQ -0.016 *** -0.011 ***

5.14 1.99 -28.25 -11.22

Recession 2 - Global -0.004 -0.011 * IMR - industrial -0.023 ***

-0.93 -1.81 -4.34

Recession 1 - Both 0.028 *** 0.035 *** IMR - global 0.053 ***

3.55 4.29 14.52

Recession 2 - Both -0.010 * -0.018 *** IMR - both -0.041 ***

-1.93 -2.78 -10.19

Recovery 1 -0.013 *** -0.009 * Adj R-squared 76284 105831

-3.19 -1.93 N 0.0738 0.063

Recovery 2 -0.007 0.007

-1.56 1.52

Recovery 1 - Industrially 0.007 0.010

0.80 1.06

Excess Leverage Continued


35

Table 8. Net Leverage – recessions separated

Note: The table reports the results for an OLS regression (Pooled Regression) with relative excess net leverage of a firm used as a




of business and operates in the U.S. and at least one more country); Recession 1 = 1 if the observation is in year 2001; Recession 2 = 1

if the observation falls in Q4 2007 – Q12009; next six variables are interaction terms of the Recession variable and the diversification




(2002)] RMVTC = relative market value of total capital; RCES relative capital expenditure to sales; RES = relative EBIT to sales; RQ

= relative Tobin’s Q. The remaining control variables (IMR – Industrial, IMR – Global, IMR – Both) are discussed in Table 2 and are

included to control for endogeneity bias. Panel regression technique is performed as an alternative to control for endogeneity bias. The

results are reported in this table under Panel Regression.

Dependent Variable

Intercept 0.021 *** Recovery 2 - Industrially -0.016 -0.016

5.98 -1.08 -1.17

Industrially 0.049 *** 0.0201 Recovery 1 - Global 0.037 *** 0.015

8.88 1.41 3.66 1.46

Globally 0.023 *** 0.031 *** Recovery 2 - Global -0.003 -0.013

6.04 2.57 -0.37 -1.31

Both 0.045 *** 0.015 Recovery 1 - Both 0.063 *** 0.055 ***

10.34 0.98 6.11 5.28

Recession 1 0.011 -0.011 Recovery 2 - Both 0.015 -0.004

1.33 -1.30 1.52 -0.40

Recession 2 -0.002 0.011 * RMVTC 0.054 *** 0.030 ***

-0.31 1.66 66.04 9.28

Recession 1 - Industrially -0.009 0.021 RCES 0.044 *** -0.023 ***

-0.61 1.41 9.07 -3.51

Recession 2 - Industrially -0.020 * -0.016 RES 0.006 *** 0.004 ***

-1.79 -1.17 9.77 3.15

Recession 1 - Global 0.070 *** 0.030 *** RQ -0.053 *** -0.026 ***

5.59 2.68 -49.56 -16.34

Recession 2 - Global -0.012 * -0.022 ** IMR - industrial -0.083 ***

-1.70 -2.53 -11.32

Recession 1 - Both 0.063 *** 0.066 *** IMR - global 0.096 ***

6.11 5.37 16.04

Recession 2 - Both 0.015 -0.014 IMR - both -0.045 ***

1.52 -1.40 -6.99

Recovery 1 -0.017 *** -0.014 ** Adj R-squared 0.1522 0.1362

-2.65 -2.01 N 76284 105831

Recovery 2 0.001 0.023 ***

0.16 3.30

Recovery 1 - Industrially 0.018 0.021

1.40 1.41

Excess Net Leverage Continued


corporate diversification and firm value during economic

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