0 The Effect of Forced Refocusing on the Value of Diversified Firms∗

This paper studies how investors responded when Chinese regulators required a group of large, publicly traded companies to divest their non-core hotel and real estate assets in 2010. The quasi-experiment allows direct estimates of the effect of diversification on value that are free from common selection problems in the literature. On average, stock prices rose 1 to 2 percent in response to forced refocusing, suggesting that corporate diversification was a value-destroying strategy for those firms. The implied “excess value/diversification discount ” has at best a weak connection to the announcement return. The abnormal return was most positive for companies in which the ultimate controller had small cash flow rights, suggesting that investors were concerned with the possibility of tunneling