Asset Tangibility, Macroeconomic Risks, and the Diversification Discount

52 Pages Posted: 16 Feb 2014 Last revised: 3 Apr 2014

See all articles by Michael Michaux

Michael Michaux

University of Southern California - Marshall School of Business

Myat Mon

University of Southern California - Marshall School of Business

Date Written: April 2014

Abstract

This paper develops a structural model of firm diversification to study the role of organizational flexibility as a tool to manage liquidity in the presence of aggregate productivity and financial shocks. The model features endogenous diversification and refocusing in a two sector economy, where each sector is characterized by a different level of asset tangibility. The estimated model is able to generate the average diversification discount as well as its substantial decrease during recessions and credit crunches as observed in the data. This decrease in the discount can be attributed to tighter collateral constraints of young single-segment firms with low asset tangibility. Counterfactual experiments show that the value of organizational flexibility -the ability to dynamically diversify and refocus- accounts for 10.5% of firm value, of which we attribute 38% to financial pooling benefits and 62% to the option to refocus.

Keywords: Diversification Discount, Conglomeration, Asset Tangibility, Credit Crunch, Liquidity, Tobin's q, Investment, Capital Structure.

JEL Classification: G32, G34

Suggested Citation

Michaux, Michael and Mon, Myat, Asset Tangibility, Macroeconomic Risks, and the Diversification Discount (April 2014). Marshall School of Business Working Paper No. FBE 04.14, Available at SSRN: https://ssrn.com/abstract=2368120 or http://dx.doi.org/10.2139/ssrn.2368120

Michael Michaux (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business, FBE
3670 Trousdale Parkway, BRI-308
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~michaux/

Myat Mon

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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