THE CONGLOMERATE DISCOUNT: A NEW EXPLANATION BASED ON CREDIT RISK
-
AMMANN, MANUEL
Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, CH-9000, St. Gallen, Switzerland
-
VERHOFEN, MICHAEL
Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, CH-9000, St. Gallen, Switzerland
Published in:
- International Journal of Theoretical and Applied Finance. - World Scientific Pub Co Pte Lt. - 2006, vol. 09, no. 08, p. 1201-1214
English
We present a simple new explanation for the diversification discount in the valuation of firms. We demonstrate that, ceteris paribus, limited liability of equity holders is sufficient to explain a diversification discount. To derive this result, we use a credit risk model based on the value of the firm's assets. We show that a conglomerate can be regarded as an option on a portfolio of assets. By splitting up the conglomerate, the investor receives a portfolio of options on assets. The conglomerate discount arises because the value of a portfolio of options is always equal to or higher than the value of an option on a portfolio. The magnitude of the conglomerate discount depends on the number of business units and their correlation, as well as their volatility, among other factors.
-
Language
-
-
Open access status
-
green
-
Identifiers
-
-
Persistent URL
-
https://sonar.ch/global/documents/11112
Statistics
Document views: 20
File downloads: