Corporate Structure and Equity Offerings: Are There Benefits to Diversification?

Abstract

In this paper we examine the effect of corporate diversification on the equity issue process. In a sample of 641 equity issues conducted over the 1983-1994 time period, we find evidence that equity issues by diversified firms are viewed less negatively by the market than are equity issues by comparable focused firms. This finding is consistent with the hypothesis that diversification helps alleviate the asymmetric information problem when raising equity, a possibility that we formally model. Our results are inconsistent with the hypothesis that valuation problems exacerbate the asymmetric information problem for diversified firms. Additionally, our results appear to be inconsistent with the hypothesis that the market views equity issues by diversified firms as a particularly strong indication that the firm will invest in poor projects.

JEL Classification: G32