Does information asymmetry explain the diversification discount?

Authors

Ronald W. Best, University of West Georgia
Charles W. Hodges, University of West Georgia
Bing Xuan Lin, University of Rhode Island

Document Type

Article

Date of Original Version

6-1-2004

Abstract

We examine the diversification discount while controlling for differences in information asymmetry between diversified and nondiversified firms. We show that both diversified and nondiversified firms with higher levels of information asymmetry have discounted firm values relative to firms with lower levels of information asymmetry, although a diversification discount remains at all levels of information asymmetry. Fixed-effect Fama-MacBeth regressions confirm the existence of a statistically significant relation between information asymmetry proxies and excess value, but they also show that a significant diversification discount remains after controlling for differences in information asymmetry and other firm characteristics discussed in earlier studies (e.g., size, profitability, leverage, and capital constraint).

Publication Title, e.g., Journal

Journal of Financial Research

Volume

27

Issue

2

Citation/Publisher Attribution

Best, Ronald W., Charles W. Hodges, and Bing Xuan Lin. "Does information asymmetry explain the diversification discount?." Journal of Financial Research 27, 2 (2004): 235-249. doi: 10.1111/j.1475-6803.2004.t01-1-00081.x.