Two Sides of a Coin: Endogenous and Exogenous Effects of Corporate Diversification on Firm Value*
Xi He(Research School of Finance, Actuarial Studies and Applied Statistics, College of Business and Economics, Australian National University)

We investigate the value effects of two types of corporate diversification – unexpected exogenous diversification and endogenous diversification. Combining Heckman’s sample-selection estimator with a two-stage least squares estimator and a generalized method of moments instrumental variables estimator to control for both endogeneity and sample-selection bias, we find that while an unexpected increase in diversification caused by exogenous shocks destroys firm value, an endogenous increase in diversification due to managerial decisions will enhance firm value, indicating a diversification premium from altering organizational structures.

*The author thanks Doug Foster, Bruce Grundy, Shi Jing, Arie Melnik, John Powell, Tom Smith, Garry Twite, Ralph Walkling, Emma Welch, and seminar participants at the 2006 Asian FA/FMA Conference, 2006 Financial Integrity Research Network (FIRN) PhD Finance Research Workshop, and 2006 FIRN Doctoral Tutorial for their helpful comments.

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Consequences of Riding Takeover Waves: Australian Evidence*
Lien Duong(School of Accounting, Curtin University)
Izan H. Y. Izan(UWA Business School, University of Western Australia)

This paper uses Australian data to analyze takeover bid premiums and long-term abnormal returns for mergers that occur during wave and non-wave periods. Findings reveal that bid premiums are slightly lower in wave periods, and bidding firms earn normal post-takeover returns (relative to a portfolio of firms matched on size and survival) if their bids were made in non-wave periods. However, bidders who announced their takeover bids during wave periods exhibit significant underperformance. For mergers that took place within waves, there is no difference in bid premiums nor is there a difference in the long-run returns of bidders involved during the first half and second half of the waves. We find that none of prominent theories of merger waves (managerial, misvaluation, and neoclassical) can fully account for Australian takeover waves and their effects. Instead, our results suggest that Banal-Estanol et al.’s screening theory of merger activity, by combining the misvaluation and neoclassical theories, may provide a better explanation.

*An earlier version of this paper was presented at the 2009 Accounting and Finance Association of Australia and New Zealand (AFAANZ), 2010 Multinational Finance Society. We would like to thank Kirsten MacDonald, Loic Belze, and other conference participants for their comments. We also acknowledge the expert computing assistance of Keith Russell.

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Internal Restructuring and Firm Survival*
Ronan Powell(School of Banking and Finance, The University of New South Wales)
Alfred Yawson(Business School, The University of Adelaide)

We examine the impact of two common methods of internal restructuring, layoffs and divestitures on the survival of a sample of UK firms. Using a Poisson regression model, we find that divestitures improve survival likelihood by reducing the probability and speed of market exit via takeover or bankruptcy, whereas layoffs increase the probability and speed of market exit via bankruptcy. Surprisingly, classifying firms into financially distressed and healthy groups, we find that distressed firms are less likely to restructure. Furthermore, while divestitures improve survival likelihood in both groups, layoff firms are less likely to survive, irrespective of whether they are distressed or healthy. Our findings are consistent with event studies that examine the market reaction to layoffs and divestiture decisions, and so provide some support for the view that the market correctly values the consequences of these restructuring actions on firm survival. The results are robust to several econometric and modeling issues, including controlling for potential self-selection bias.

*We thank Philip Brown, Raymond Da Silva Rosa, Neil Fargher, Janice How, Izan Izan, Debra Jeter, Alan Kilgore, Raymond Liu, Geoffrey Loudon, Sian Owen, Russell Poskitt, Ah Boon Sim, Susan Thorp, Cameron Truong, Peter Verhoeven, Scott Walker, Jilnaught Wong, and seminar participants at the 23rd Australasian Banking and Finance conference, Financial Management Annual Meetings, Orlando, the University of Auckland, Macquarie University, the University of Technology Sydney, and University of Western Australia for helpful comments and suggestions. Naturally, with respect to the article, the usual caveat applies.

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Industry Merger Intensity and Cost of Capital*
Abdullah Mamun(Edwards School of Business, University of Saskatchewan)
Dev Mishra(Edwards School of Business, University of Saskatchewan)

Using a panel of industry-average implied cost of equity capital and the value of prior year aggregate industry mergers, we find strong evidence that the industry cost of equity capital is negatively associated with industry merger activity. Our evidence is consistent with greater media coverage, analyst following, or increase in investor attention associated with industry merger activity lowering the required return on equity for firms in an industry that is not involved in merger activity via the ‘information risk’ or ‘incomplete information’ channels.

*We acknowledge the financial support from the Center of Strategic Financial Management at Edwards School of Business. We thank seminar participants at the Asian Finance Association Annual Meeting in Hong Kong, 2010. We also thank Craig Wilson, Sudipto Dasgupta, and an anonymous referee.

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Do Financial Reforms Improve the Performance of Financial Holding Companies? The Case of Taiwan*
Meng-Chun Kao(Department of Finance, Yuanpei University of Science and Technology)
Chien-Ting Lin(School of Accounting, Economics and Finance, Deakin University and Adelaide Business School, University of Adelaide)
Lei Xu(Adelaide Business School, University of Adelaide)

We examine the performance of financial holding companies (FHCs) in Taiwan after the financial reform that removes the separation of banking, securities, insurance, and other financial services. Using data envelopment analysis, we find that FHCs fail to improve technical efficiencies in the post-reform era. They also do not outperform independent commercial banks after the financial reform. Lower technical efficiency caused by excess operating expenses appears to be the primary source of inefficiency. While scale efficiency may improve as FHCs grow larger, the benefits are marginal and insufficient to offset the potential costs of organizational diseconomies. Our findings suggest that increasing the size and scope of financial activities alone do not necessarily improve the performance of financial firms.

*We would like to thank an anonymous referee, the associate editor, and especially Sudipto Dasgupta (the editor) for their comments and suggestions that greatly improved the paper. We also would like to thank the National Science Council of Taiwan for the financial support.

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