The Valuation Discount of Diversified Firms in Australia

This paper refines the Berger and Ofek (1995) methodology to estimate the valuation discount of diversified firms in Australia between 1988 and 1998. Mixed evidence is found for the diversification discount, with diversified firms trading at a discount to single segment firms using an earnings-based excess value measure and at a premium employing an assets excess value measure. Measurement errors are identified with the earning-based excess value measure and refinements are presented. Ordinary Least Squares (OLS) regression models are applied to explain the variations in the diversification results. There is strong evidence for differential pricing of diversified firms in Australia with higher performing diversified firms trading at a premium to single segment firms