The Journal of Finance

The Value of Diversification During the Conglomerate Merger Wave

Published: 09/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb04067.x

HENRI SERVAES

The current trend toward corporate focus reverses the diversification trend of the late 1960s and early 1970s. This article examines the value of diversification when many corporations started to diversify. I find no evidence that diversified companies were valued at a premium over single segment firms during the 1960s and 1970s. On the contrary, there was a large diversification discount during the 1960s, but this discount declined to zero during the 1970s. Insider ownership was negatively related to diversification during the 1960s, but when the diversification discount declined, firms with high insider ownership were the first to diversify.

Tobin's Q and the Gains from Takeovers

Published: 03/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03758.x

HENRI SERVAES

This paper analyzes the relation between takeover gains and the q ratios of targets and bidders for a sample of 704 mergers and tender offers over the period 1972–1987. Target, bidder, and total returns are larger when targets have low q ratios and bidders have high q ratios. The relation is strengthened after controlling for the characteristics of the offer and the contest. This evidence confirms the results of the work by Lang, Stulz, and Walkling and shows that their findings also hold for mergers and after controlling for other determinants of takeover gains.

International Evidence on the Value of Corporate Diversification

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00186

Karl Lins, Henri Servaes

The valuation effect of diversification is examined for large samples of firms in Germany, Japan, and the United Kingdom for 1992 and 1994. We find no significant diversification discount in Germany, but a significant diversification discount of 10 percent in Japan and 15 percent in the U.K. Concentrated ownership in the hands of insiders enhances the valuation effect of diversification in Germany, but not in Japan or the U.K. For Japan, only firms with strong links to an industrial group have a diversification discount. These findings suggest that international differences in corporate governance affect the impact of diversification on shareholder wealth.

Analyst Following of Initial Public Offerings

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04811.x

RAGHURAM RAJAN, HENRI SERVAES

We examine data on analyst following for a sample of initial public offerings completed between 1975 and 1987 to see how they relate to three well‐documented IPO anomalies. We find that higher underpricing leads to increased analyst following. Analysts are overoptimistic about the earnings potential and long term growth prospects of recent IPOs. More firms complete IPOs when analysts are particularly optimistic about the growth prospects of recent IPOs. In the long run, IPOs have better stock performance when analysts ascribe low growth potential rather than high growth potential. These results suggest that the anomalies may be partially driven by overoptimism.

The Cost of Diversity: The Diversification Discount and Inefficient Investment

Published: 03/31/2007   |   DOI: 10.1111/0022-1082.00200

Raghuram Rajan, Henri Servaes, Luigi Zingales

We model the distortions that internal power struggles can generate in the allocation of resources between divisions of a diversified firm. The model predicts that if divisions are similar in the level of their resources and opportunities, funds will be transferred from divisions with poor opportunities to divisions with good opportunities. When diversity in resources and opportunities increases, however, resources can flow toward the most inefficient division, leading to more inefficient investment and less valuable firms. We test these predictions on a panel of diversified U.S. firms during the period from 1980 to 1993 and find evidence consistent with them.

Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis

Published: 03/19/2017   |   DOI: 10.1111/jofi.12505

KARL V. LINS, HENRI SERVAES, ANE TAMAYO

During the 2008–2009 financial crisis, firms with high social capital, as measured by corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High‐CSR firms also experienced higher profitability, growth, and sales per employee relative to low‐CSR firms, and they raised more debt. This evidence suggests that the trust between a firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.

Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing

Published: 03/27/2014   |   DOI: 10.1111/jofi.12153

RAMIN P. BAGHAI, HENRI SERVAES, ANE TAMAYO

Rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009; holding firm characteristics constant, average ratings have dropped by three notches. This change does not appear to be fully warranted because defaults have declined over this period. Firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth. Their debt spreads are lower than those of unaffected firms with the same rating, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted.