The effect of diversification on company value during a global health crisis: evidence from the COVID-19 pandemic
ISSN: 0307-4358
Article publication date: 2 February 2023
Issue publication date: 13 July 2023
Abstract
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/value
The 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.
Keywords
Acknowledgements
The authors would like to thank Joanne Corlett and Patrick Stettner for providing valuable comments and insights.
Citation
Fruehling, N., Beyer, H.-M. and Goeddeke, A. (2023), "The effect of diversification on company value during a global health crisis: evidence from the COVID-19 pandemic", Managerial Finance, Vol. 49 No. 8, pp. 1327-1341. https://doi.org/10.1108/MF-06-2022-0251
Publisher
:Emerald Publishing Limited
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