Market Valuation of Corporate Diversification in the Presence of Internal Capital Markets in Emerging Countries

This study examines the valuation of corporate diversification in three emerging countries: Thailand, Indonesia and the Philippines. Over the period of study (1992–2001 for Thailand and 1994–2001 for Indonesia and the Philippines), it is found that there is evidence of diversification discount in all three countries. The largest amount of discount exists in the Philippines (60.1%), followed by Indonesia (25.5%) and Thailand (15.1%). Then, the sample is divided into two sub-periods: before the crisis (1992–1996) and after the crisis (1997–2001). Before the crisis, the diversification discount existed only in the Philippines, with the average of 49%. There is not enough evidence that diversified firms in both Thailand and Indonesia traded at discount, compared to focused firms. After the crisis, however, it is found that there is difference in market valuation between diversified and focused firms in ail three countries, with the average discount of 84.3% in the Philippines, 33.2% in Indonesia and 16.7% in Thailand. The results are confirmed after performing the regression on yearly data as well as panel data analysis. This study also finds that growth, represented by capital expenditure-to-sales ratio, signals good news to the market. It could add value to the firms although the amount is relatively small. On the other hand, investors evaluate debt as bad news. Therefore, an increase in debt could result in a value reduction