Journal article

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
  • 2011-11-21
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
  • English
Open access status
green
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Persistent URL
https://sonar.ch/global/documents/11112
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