VALUE AND RISK EFFECT OF
CORPORATE DIVERSIFICATION FOR MALAYSIAN LISTED PROPERTY COMPANIES (1999 – 2001)
By
SHI LI JIAO
ABSTRACT
Prior literature finds that corporate
diversification reduces the firm’s value relative to the sum of shareholders’
value and bondholders’ value. However, many investors still exercise corporate
diversification due to portfolio theory as well as previous empirical studies
documented there may exist risk reduction from diversification. In this paper,
the researcher conducts a similar study to explore Malaysian listed property
companies’ value and risk effect arisen from corporate diversification. The
aims of this study are to determine: (i) whether corporate diversification or
focused strategy makes Malaysian listed property companies achieve higher
firms’ value; (ii) whether diversified listed property companies have lower
risk than focused listed property companies; (iii) whether the Malaysian listed
property companies should focus on investing in single property type within single
region, or diversify business into several property types across several
regions. A sample of 30 Malaysian listed property companies is selected and
covers from 1999 to 2001. To investigate value effect of corporate
diversification, firm’s excess value is adopted as the comparable variable
between diversified companies and focused companies. Risk level of a company is
computed as standard deviation of annual returns. Risk return analysis is used
as the measurement of diversification through property types and regions.
Following Harry Markowitz and other researchers, company’s risk-return
performance is evaluated by the shape of efficient frontier. Through
statistical testing, the researcher concludes that in Malaysia, corporate
diversification destroys listed property companies’ values whilst it does not
reduce the companies’ risks. From another aspect, the researcher finds that
companies diversified into several property types across several property
regions are performing healthier, as they can operate in lower risk and at the
same time can generate higher return. This study fills in the gap of rare
researches on diversification in Malaysia compared to other foreign countries
such as US, UK and Australia. The findings of the study also assist the investors
and portfolio managers to make sound decisions. Meanwhile, this paper helps the
future researchers to carry out any studies on corporate diversification.
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B. A. (Hons) In Accounting
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