| Summary: | 碩士 === 東海大學 === 企業管理學系碩士班 === 91 === In this paper, we take Taiwan stock market for example to argue the long-term accounting performance and stock return of diversification. Fama and French (1993) develop three-factor model to examine the long-term abnormal return. We use three-factor model to control for the known determinants of stock return and use both product and segment data for the entropy measure. Further, we also consider how the industry effect and firm-specific characteristics influence diversified firms.
Our findings suggest that the valuation of product diversification differs with two performance measures. Less product-diversified firms have better accounting ratios but worse stock return. Additionally, we use segment data to measure diversification. Segment diversification has same valuation with accounting ratios and stock return. Further, we attempt to explain this different valuation of product diversification in terms of industry effect and firm-specific characteristics. We find evidence supportive of the view that diversification provides non-electronic firms with higher value. The characteristics of firms that diversify, which make the benefits of diversification greater than the costs of diversification, may also cause firms to be discounted. A proper evaluation of the effect of diversification on firm value should take into account the firm-specific characteristics that bear both on firm value and on the decision to diversify. We find evidence that the positive diversification/return relation is stronger for firms with higher cash flows and lower debt ratios, which probably have a greater financial capability. Firms with lower book-to-market ratio are more suitable for diversification. To summarize, our results are diversification can improve stock return. However, firm-specific characteristics would affect the consequence of diversification. Firms should adopt proper diversification strategies according to their own characteristics.
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