Universidad Santo Tomás

Working Paper

June 2000.

 
Stock Price Performance for Corporate Focus

Strategy in Chile.

Guillermo Yáñez C.*

Abstract.

The following event study analyzes the effect on the value of the firm’s equity of the adoption of a corporate focus strategy in contrast to a diversification strategy.

Apparently in accordance with Markowitz’s (1952) portfolio theory, companies have adopted the diversifying strategy as their maxim at the time they defined their growing strategy. From the early sixties, huge American corporations as ITT or AT&T made of his incorporating a great quantity of non-related businesses, under the basic assumption that diversification was a value-creation strategy. In Chile, in the late seventies and eighties, the evidence was very similar as financial conglomerates like Angelini or Luksic, attempted to keep under their holding structure many different subsidiaries in the most diverse business areas.

Nevertheless, there is no theoretic or empirical evidence that suggests categorically that diversification would create value for a firm or furthermore would increase shareholder wealth. The rationale under portfolio theory is that diversification would reduce unsystematic risk, but would there be any reason for the market to place a premium to those firms who actively diversify if investors are capable to build a diversified portfolio by themselves? This paper will test the hypothesis of value-creation of a corporate focus strategy, verifying the null hypothesis as the absence of abnormal return for shareholders after a restructuring that increases the company’s focus degree. Although there is no statistically significant evidence, the tests suggest a relatively small positive abnormal return for the firm that engages in divestitures programs in Chile . I will also appraise this shareholder wealth effect. This conclusion would be consistent with most evidence in overseas. See for example, Alexander, Benson & Kampmeyer (1984), Klein (1986), Comment & Jarrell (1995) or Lang, Poulsen & Stulz (1995), among others.

In the first section of this paper we can find the most relevant evidence referred to corporate focus in the last decades. In the second section, I review the theoretical and empirical evidence on corporate focus and diversification, understanding focus as divestitures, spin-offs, split-offs, split-ups or equity carve-outs and the effect of the adoption of such strategies on shareholder wealth. In section three, I discuss the main techniques for measuring corporate focus, such as the Breakup 100 model or the most popular Herfindahl-Hirshman index. In section IV, I expose the determination of the estimated betas for the firms in the sample using the statistical market model and the adjusted market model for unsynchronous transactions with Dimson (1979). In section five, I discuss the results measured as positive abnormal return after the announcement of the adoption of a corporate focus strategy and, finally, I discuss the conclusions.

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