Both revenues and earnings of diversified firms are increasingly being reported, to the government and the public, on a subentity basis. Adequate criterial foundations do not exist to permit the effective general prescription of specific segment delineations, nor is it known whether such criterial assists can be usefully developed.Demands for segmentation in financial reports are currently intense. Actual reporting practices are largely nonstandardized as to either the definition of segments employed or, the disclosure modes used to present them. Neither conceptual nor theoretical supports are now adequate in guidance to the forms and levels of segmentation activity now required. Prerequisite to effective development of such supports is an-adequate understanding of the corporate diversification phenomenon itself. This dissertation project investigates and analyzes the nature of corporate diversification, as manifested in (1) its historical evolution; (2) general comprehensions of the phenomenon, as evidenced in published opinions and conceptual reasoning schemes of both authoritative experts and lay investors; and (3) formal research by others. Additionally, the results of these investigations and analyses are developed into conceptual schemes and theoretical frameworks, at moderate levels of abstraction.

In chapter 1, I provide evidence against the claim in the conventional literature on corporate diversification discount that the diversification effect is homogeneous across the industries. I argue that the responsiveness of consumer demand to the changing economic conditions or the product demand sensitivity is an important characteristic of the industries that should be considered to have a more complete understanding of the issue of underperformance of diversified firms compared to single-segment firms. Differentiating industries based on the measure of product demand sensitivity, I show that the diversification effects are not to be homogeneous across the industries. Much of the value destroying effect from the diversification gets reduced when industry experiences any shock or increase in the sensitivity of demand. It implies a better shock observing capacity of diversified firms and a source of premium that conglomerates can enjoy due to their diversified operations during the periods of the increase of sensitivity of product demand. Our result is robust to difference specification and difference measure of sensitivity. In chapter 2, I include organizational forms as industrial and global diversification, and geographic dispersion in the empirical framework to find out which types of diversification do matter for the cost of bank loans. I find that firms which are only globally diversified, neither industrially diversified nor geographically dispersed, experience higher cost of bank loans. The other types of firms incurring higher cost of bank debt are the firms which are only geographically dispersed, and the firms which are diversified in all three ways with the combination of geographic, global, and industrial diversification. Examining the effects of organizational forms on the non-price loan terms, I observe that covenant restrictions are generally higher for the combination of diversified firms which are either both geographically dispersed and industrially diversified, or geographically dispersed and globally diversified.

O objetivo do presente estudo foi verificar empiricamente as implicações da diversificação corporativa, através do efeito de coinsurance, nas finanças e no investimento corporativo através de dois canais específicos: o custo da dívida externa bancária das empresas e a probabilidade de ocorrência de covenants com restrições à investimento. Para alcançar esse objetivo, estimou-se dois modelos que controlam a endogeneidade da decisão de diversificar através da utilização de variáveis instrumentais. Não foi possível, através dos dados utilizados no estudo, evidenciar que a diversificação corporativa impacta o custo do financiamento externo bancário das empresas. O estudo encontrou evidências, ainda que fracas, de que a diversificação corporativa reduz a probabilidade de ocorrência de covenants com restrições a gastos em investimento nos contratos de financiamento bancário. / The purpose of this study is to empirically verify the implications of corporate diversification, through coinsurance effect, in corporate finance and investment through two specific channels: the cost of bank borrowing and the likelihood of covenants with investment restrictions. To achieve this goal, this study estimated two models that control the endogeneity of the diversification decision by using an instrumental variables approach. The results do not show evidences that corporate diversification affects the cost of bank borrowing. In addition, the analysis suggests that corporate diversification reduces the likelihood of covenants with investment restrictions in bank borrowing contracts. Although the evidence is weak, it brings a new insight into how corporate diversification affects corporate results.

Las diferencias existentes entre la teoría financiera y las estrategias administrativas no han llegado a tener una participación conjunta en beneficio de la maximización de rendimientos que ellos siempre han atendido de manera independiente. Bavaria es uno de los pocos casos documentados académicamente para ser usado como caso de estudio en Latinoamérica, y es porque cuando estuvo en la administración del Grupo Santo Domingo, tuvo diversas decisiones en las que influyo la diversificación corporativa y las adquisiciones de empresas con el fin de expandirse para así convertirse en un gran grupo cervecero sino también en un gran holding luego de la escisión. La presente investigación nos llevará a ver por qué la teoría administrativa sigue centrándose en los problemas habituales del riesgo específico a través de la diversificación corporativa, cuando la teoría financiera dicta todo lo contrario para centrarse únicamente en el riesgo y el rendimiento como componentes de la teoría del portafolio. Con la finalidad de que cada uno de nosotros comprendamos el valor que aporta cada una de estas perspectivas, y se sugiera de que existe la necesidad de buscar una cohesión teórica entre ambos pensamientos, para lograr un beneficio en la búsqueda de rendimientos hacia las empresas que se encuentran en un mercado cada vez más competitivo y cambiante tanto por la innovación como la satisfacción de nuevas necesidades en los seres humanos. / The differences between financial theory and management strategies have not come to have a joint participation in benefit of the maximization of returns that they have always attended independently. Bavaria is one of the few cases documented academically to be used as a case study in Latin America, and is because when he was in the administration of the Santo Domingo Group he had several decisions influenced by corporate diversification and acquisitions of companies in order to expand to become a large beer group but also a large holding after the split. The present investigation will lead us to see why administrative theory continues to focus on the usual problems of specific risk through corporate diversification, when financial theory dictates the opposite to focus solely on the risk and performance of the components in the company portfolio theory. In order that each of us understand the value of each of these perspectives, and suggest that there is a need to seek a theoretical cohesion between both thoughts, to achieve a profit in the returns to the companies that are in the search for a market increasingly competitive and changing both for innovation and the satisfaction of new needs in human beings. / Trabajo de Suficiencia Profesional

O objetivo do presente estudo foi verificar empiricamente as implicações da diversificação corporativa, através do efeito de coinsurance, nas finanças e no investimento corporativo através de dois canais específicos: o custo da dívida externa bancária das empresas e a probabilidade de ocorrência de covenants com restrições à investimento. Para alcançar esse objetivo, estimou-se dois modelos que controlam a endogeneidade da decisão de diversificar através da utilização de variáveis instrumentais. Não foi possível, através dos dados utilizados no estudo, evidenciar que a diversificação corporativa impacta o custo do financiamento externo bancário das empresas. O estudo encontrou evidências, ainda que fracas, de que a diversificação corporativa reduz a probabilidade de ocorrência de covenants com restrições a gastos em investimento nos contratos de financiamento bancário. / The purpose of this study is to empirically verify the implications of corporate diversification, through coinsurance effect, in corporate finance and investment through two specific channels: the cost of bank borrowing and the likelihood of covenants with investment restrictions. To achieve this goal, this study estimated two models that control the endogeneity of the diversification decision by using an instrumental variables approach. The results do not show evidences that corporate diversification affects the cost of bank borrowing. In addition, the analysis suggests that corporate diversification reduces the likelihood of covenants with investment restrictions in bank borrowing contracts. Although the evidence is weak, it brings a new insight into how corporate diversification affects corporate results.

O objetivo do presente estudo foi verificar empiricamente as implicações da diversificação corporativa, através do efeito de coinsurance, nas finanças e no investimento corporativo através de dois canais específicos: o custo da dívida externa bancária das empresas e a probabilidade de ocorrência de covenants com restrições à investimento. Para alcançar esse objetivo, estimou-se dois modelos que controlam a endogeneidade da decisão de diversificar através da utilização de variáveis instrumentais. Não foi possível, através dos dados utilizados no estudo, evidenciar que a diversificação corporativa impacta o custo do financiamento externo bancário das empresas. O estudo encontrou evidências, ainda que fracas, de que a diversificação corporativa reduz a probabilidade de ocorrência de covenants com restrições a gastos em investimento nos contratos de financiamento bancário. / The purpose of this study is to empirically verify the implications of corporate diversification, through coinsurance effect, in corporate finance and investment through two specific channels: the cost of bank borrowing and the likelihood of covenants with investment restrictions. To achieve this goal, this study estimated two models that control the endogeneity of the diversification decision by using an instrumental variables approach. The results do not show evidences that corporate diversification affects the cost of bank borrowing. In addition, the analysis suggests that corporate diversification reduces the likelihood of covenants with investment restrictions in bank borrowing contracts. Although the evidence is weak, it brings a new insight into how corporate diversification affects corporate results.

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act (GLBA), of 1999 has permitted U.S. bank holding companies (BHCs) to operate in non-banking activities that are financial in nature. This dissertation addresses the impact of this across-activity diversification within the U.S. financial services industry on the profitability and the risk-adjusted performance of bank holding companies. Using a variety of diversification measures, the study analyzes the relationship between corporate diversification and the financial performance of BHCs pre- and post-GLBA, from 1990 to 2011. The analysis of the profitability-diversification relationship provides evidence that the negative impact of revenue diversification on the profitability of banking firms that exists in the literature is mainly due to measurement and model specification issues. Failure to differentiate between interest-versus-noninterest and banking-versus-nonbanking types of revenue diversification has resulted in using measures of the first type of diversification to study the second, leading to inaccurate results. Moreover, introducing nonlinearity to the relationship between revenue diversification and profitability provides evidence that this relationship is negative only at relatively low levels of diversification but positive if the level of diversification is sufficiently high. Controlling for these measurement and model specification issues results in profitability premium, rather than discount, that is associated with higher levels of revenue diversification. The study also employs an event study methodology to measure how stock markets respond to mergers and acquisitions (M&As) in which BHCs acquire other banking and nonbanking financial targets. The cumulative abnormal returns (CARs) to acquirers and targets show that M&A that are either non-diversifying or diversifying within closely-related credit intermediation activities increase the value of merged firms. The effect of M&As that combine less-related financial activities on firm value is either negative or insignificant. This implies that market participants have better expectations of the future performance of less diversified firms in managing the risk-return trade-off. Comparing the average CARs of the pre- and post-GLBA eras supports this conclusion.