The value of corporate diversificationan analysis through the real options lens

Résumé

This PhD dissertation analyses the relationship between corporate diversification and firm value from the real options (RO) approach. The diversification-value linkage has inspired abundant research, with outstanding contributions especially from the fields of strategic management and finance. However, the controversy surrounding the issue does not seem to have dissipated, and the question of whether corporate diversification creates or destroys value for firms remains open. In this dissertation, we argue that the impact of diversification is contingent on the firm¿s growth opportunities, which are considered by the RO theory as an important source of value for firms. Our research adopts an options-based perspective, from which diversification appears as a path-dependent strategy based on the serial purchase and exercise of call options. This dissertation contributes to extending the applicability of the real options approach to strategy, and suggests the relevance of incorporating a multidimensional view and contingent analysis in the diversification debate. The theoretical body of this dissertation is structured in two chapters. Chapter 1 contains the review of the literature on corporate diversification, with special emphasis on the empirical evidence concerning the diversification-value relation. In Chapter 2, we introduce the RO approach and its main applications to the analysis of corporate strategies, as well as our model and study hypotheses to test in the three subsequent chapters. This dissertation consists of three empirical studies, based on a panel sample of U.S. firms from 1998 to 2010 and the use of econometric techniques to control for the endogeneity of the diversification decision. In Chapter 3, we investigate whether firm¿s growth options can explain the influence of diversification on firm value. We find that, at lower levels of diversification, this corporate strategy mainly involves exercising previously acquired investment opportunities, whereas in subsequent stages it primarily becomes a source of growth options (U-form relationship). Our results also reveal a partial mediating role of growth opportunities in the diversification-value relationship. This strategy proves value-creating by enhancing the firm¿s growth options (indirect effect) stemming from the interplay of multiple businesses and thus cannot be replicated by individual investors in external capital markets. In Chapter 4, we test whether the value effect of diversification depends on ¿how¿ this strategy is implemented. We consider two diversification strategies: one based on one-step investments, exercising available options immediately (an assets-in-place diversification), and another aimed at constantly building new growth options in subsequent businesses through low-scale investments (options-based diversification). We develop an index to proxy for these diversification patterns and we find that as diversification approaches a real options pattern, it proves more beneficial in terms of value creation. The final empirical study is offered in Chapter 5. Here, we examine how corporate diversification interacts with the firm¿s growth options portfolio. We focus on two dimensions of this strategy: degree of diversification and relatedness between segments. First, we find an inverted U-shaped relation between relatedness and the firm¿s growth options ratio. Results also indicate that this relationship is less pronounced in high than low diversifiers. Additionally, we show that risk of preemption negatively moderates the U-form relation between degree of diversification and growth opportunities documented in Chapter 3. In short, this dissertation shows the relevance of growth opportunities in the value effect of corporate diversification. Insofar as the growth opportunities which this strategy can give access to are not replicable by individual investors, corporate diversification becomes an efficient and therefore, value-creating strategy. For management practice, this dissertation reveals how important the way strategies are implemented may prove for value creation.