corporate diversification and long-run performance of seo firms --evidence from taiwan

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Corporate Diversification and Long-run Performance of SEO Firms --Evidence from Taiwan--. Jeng-Ren Chiou Ming-Yuan Li Ting-Kai Chou Chao-Ya Wan. Outline. 1. Introduction. 2. Hypothesis Development. 3. Data and Empirical Design. 4. Empirical Results Analysis. 5. Conclusions. Introduction. - PowerPoint PPT Presentation

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  • Corporate Diversification and Long-run Performance of SEO Firms--Evidence from Taiwan--Jeng-Ren ChiouMing-Yuan LiTing-Kai ChouChao-Ya Wan

  • Outline1. Introduction2. Hypothesis Development 3. Data and Empirical Design 4. Empirical Results Analysis 5. Conclusions

  • IntroductionA large and growing literature examines the consequences of corporate diversification.diversified firms sell at a discount relative to focused firms. stock prices tend to fall when firms announce focus-decreasing corporate actions.

    The prior evidence suggests that the costs of corporate diversification exceed the benefits.

  • IntroductionRecent papers try to identify some of the costs of diversification by examining the investment patterns of diversified firms.Scharfstein (1998)Rajan, Servaes and Zingales (2000)

    Cross-subsidization phenomenon A conglomerate firm always invest more in weak division than their stand-alone industry peers.diversified firms would invest more in relatively poorer projects than focused firms

  • IntroductionThere is little empirical work that directly identifies the benefits of diversification.Lewellen (1971) - coinsurance effects increase a diversified firms debt capacity relative to the aggregate debt capacity of its individual divisions as stand-alone firms.Williamson (1975) , Stein (1997), Lamont (1997) and Shin and Stulz (1998) - internal capital market and efficiently allocating cash across divisions.

  • Research ObjectiveWe try to provide evidence on the potential benefits associated with corporate diversificationexamine the effect of diversification on subsequent performance following the equity issues.

    The direction of relationship between diversification and post-SEO performance is unclear.

  • Hypotheses DevelopmentInternal capital market hypothesisIn diversified firms, profitable product lines can allocate much needed capital to negative cash flow businesses.There may also be positive synergies between the lines of businesses of the issuing firms.Under the assumptions of efficient internal capital markets and/or synergies, we would expect a positive relationship between diversification and post-SEO long run performance.

  • Hypotheses DevelopmentResource misallocation hypothesisBerger and Ofek (1995) provide an exposition on how corporate diversification can decrease firm value.There may be a higher propensity for the misallocation of capital across business segments through inefficient cross-subsidization in a diversified firm.Rajan, Servaes, and Zingales (2000)Scharfstein and Stein (2000).We expect a negative relationship between diversification and post-SEO long run performance.

  • DataSeasoned equity offerings on the Taiwan Securities Exchange over 1995-2002. exclude financial companies and firms without complete data.A total of 386 equity issues remain after our selection criteria.Sample Selection

    Number of SEOs issued in the period 1995 to 2002 on the Taiwan Securities Exchange507Less: utilities and financial firms(54)Less: missing data on stock returns within 3 years after the SEO(35)Number of firms conducting SEO with complete returns in the sample period418Less: missing data on diversification calculation-related variables(12)Less: missing data on regression control variables(20)Sample386

  • Sample Distribution by Year Most of the offerings occur in the 1996-1998 periods. Due to the economic recession in Taiwan capital markets, only five offerings conducted in 2001.

    SEO year

    Sample size

    Gross proceeds/

    Firm size (%)

    Gross proceeds

    (million NT$)

    Gross proceeds

    (million US$)

    1995

    53

    2.268

    118.630

    4.357

    1996

    61

    3.672

    265.119

    9.658

    1997

    117

    9.153

    588.257

    18.089

    1998

    75

    6.535

    470.109

    14.618

    1999

    36

    3.979

    239.752

    7.633

    2000

    28

    9.950

    785.171

    23.757

    2001

    5

    0.793

    227.400

    6.516

    2002

    11

    3.113

    910.058

    26.226

    Total

    386

    39.463

    3604.496

    110.854

  • Sample Distribution by IndustryThe SEO sample varies by industry from 143 offerings in the electronics classification to 1 offering from automobile industry.

    Industry

    TEJ

    Sample

    size

    Gross proceeds/

    Firm size (%)

    Gross proceeds

    (million NT$)

    Gross proceeds

    (million US$)

    Cement

    11

    3

    1.278

    310.300

    9.687

    Food

    12

    16

    2.965

    94.781

    3.053

    Plastics

    13

    11

    1.703

    420.670

    13.295

    Textiles

    14

    36

    3.394

    152.642

    4.920

    Electric, Machinery

    15

    20

    3.626

    121.198

    3.815

    Appliance, Cable

    16

    12

    1.227

    263.795

    8.424

    Chemical

    17

    15

    6.833

    145.329

    4.503

    Glass, Ceramics

    18

    4

    5.819

    206.946

    6.653

    Paper, Pulp

    19

    4

    1.302

    81.114

    2.709

    Steel, Iron

    20

    22

    8.606

    454.297

    14.276

    Automobile

    21

    1

    1.558

    94.500

    3.470

    Transportation

    22

    2

    0.696

    255.275

    7.937

    Elect.& Computer

    23

    143

    7.706

    563.594

    17.617

    Construction

    25

    51

    8.434

    767.447

    24.024

    Transportation

    26

    13

    5.509

    498.001

    16.868

    Tourism

    27

    2

    1.805

    108.197

    3.342

    Department Stores

    29

    8

    6.385

    439.214

    13.646

    Others

    99

    23

    4.524

    273.005

    8.574

  • MethodologyBuy-and-Hold Abnormal Returns (BHAR)

    BHAR represents the monthly compounding return for issuing firm from a buy and hold strategy, adjusted by the holding period return on the benchmark during the corresponding period.size-matched portfolioB/M-matched portfoliosize-and-B/M-matched portfolio

  • MethodologyMeasure of Diversification (1)Herfindahl index (HINDEX) - reflects the degree to which the sales of a firm are concentrated within its divisions.

    The variable HINDEX equals 1 for all single-segment firms and is less than 1 for multiple-segment firms.Smaller levels of HINDEX correspond to less industry focus and greater diversification.

  • MethodologyMeasure of Diversification (2)Diversification Dummy (DIV) - identify whether a firm has multiple segments or not. The DIV equals 1 if the firm has multiple segments, and 0 otherwise.

  • We find that SEO issuers, on average, have two segments.The mean Herfindahl index is 0.781.The mean gross proceeds are 436.03 million NT dollars or US$ 13.03 million. Compared with other developed capital market like the U.S., and Japan, gross proceed for Taiwan SEOs are much smaller.Empirical Results-Summary Statistics of SEOs-

  • Empirical Results-Post-SEO Long-run Performance-Taiwan SEO firms dont exhibit long run under-performanceThe result is robust to various benchmarks

  • Empirical Results-Summary Stat. by Issuer-Type-Relative to focused issuers, the diversified issuers have lower offering price and R&D intensity, but have longer listing history and larger assets amounts.

  • Univariate ComparisonsThe 3-year period buy-and-hold abnormal returns for single-segment SEO firms show significant underperformance phenomenon. The result is robust to various benchmarks including size-matched, B/M matched, and size-and-B/M matched portfolios. However, the post-issue buy-and-hold abnormal returns for multiple-segment SEO firms show significant outperformance. The result is also robust to various benchmarks. A test that the mean post-issue performance for single- and multiple-segment issuers are equal is rejected at 1% level.

    Panel A-1: Post-issue long-run buy-and-hold stock returns for single-segment firms

    First year

    First 2 years

    First 3 years

    Abnormal

    Return (%)

    Wealth Relative

    Abnormal

    Return (%)

    Wealth Relative

    Abnormal

    Return (%)

    Wealth Relative

    A. Based on size-matched portfolios

    Performance

    2.69

    1.03

    -8.16*

    0.91

    -17.25***

    0.80

    Significant test

    0.73

    -1.67

    -3.00

    B. Based on B/M-matched portfolios

    Performance

    2.49

    1.03

    -6.62

    0.93

    -13.95***

    0.83

    Significant test

    0.71

    -1.43

    -2.58

    C. Based on size-and-B/M-matched portfolios

    Performance

    1.37

    1.01

    -6.49

    0.93

    -13.41***

    0.84

    Significant test

    0.40

    -1.42

    -2.52

    Panel A-2: Post-issue long-run buy-and-hold stock returns for multi-segments firms

    A. Based on size-matched portfolios

    Performance

    5.55**

    1.06

    7.67**

    1.08

    8.82*

    1.11

    Significant test

    2.07

    1.98

    1.94

    B. Based on B/M-matched portfolios

    Performance

    6.46**

    1.07

    9.18**

    1.10

    13.72***

    1.17

    Significant test

    2.49

    2.42

    3.24

    C. Based on size-and-B/M-matched portfolios

    Performance

    4.38*

    1.04

    7.57**

    1.08

    10.27**

    1.13

    Significant test

    1.67

    1.98

    2.40

    Panel A-3: Test-statistics for difference in excess return (%)

    Benchmark portfolio

    t-stat.

    z-stat.

    t-stat.

    z-stat.

    t-stat.

    z-stat.

    size-matched

    -0.58

    1.29

    -2.60***

    0.75

    -3.75***

    2.30**

    B/M-mat

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