Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-25T08:07:31.380Z Has data issue: false hasContentIssue false
  • English
  • Français

Diversification, Financial Leverage and Conglomerate Systematic Risk

Published online by Cambridge University Press:  06 April 2009

James M. Gahlon  and
Roger D. Stover
Get access Rights & Permissions [Opens in a new window]

Extract

Of the many conglomerate studies to date, some have dealt with the risk-return performance of conglomerates in the context of the capital asset pricing model [2,7,10,14], others have considered the motives for the formation of conglomerates [4,5,6,13], and still others have examined the operating characteristics of conglomerates [9,12,15]. Within the last group, Weston and Mansinghka [15, p. 928] argued that the primary motivation for conglomerate formation is defensive diversification, “…defined as diversification to avoid adverse effects on profitability from developments taking place in the firm's traditional product market areas.” Another motivation is provided by Levy and Sarnat [4] and Lewellen [5] who demonstrated that the only economic gain from a purely conglomerate merger may be the increased debt capacity resulting from the combination of entities having imperfectly correlated earnings streams.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 5 , December 1979 , pp. 999 - 1013
Copyright
Copyright © School of Business Administration, University of Washington 1979

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Hamada, Robert S. “The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks.” Journal of Finance, Vol. 27 (05 1972), pp. 435–452.CrossRefGoogle Scholar
[2]Joehnk, Michael D., and Nielson, James F.. “The Effects of Conglomerate Merger Activity on Systematic Risk.” Journal of Financial and Quantitative Analysis, Vol. 9 (03 1974), pp. 215–225.CrossRefGoogle Scholar
[3]Johnston, J.Econometric Methods, 2nd ed.New York: McGraw-Hill Book Co. (1972).Google Scholar
[4]Levy, Haim, and Sarnat, Marshall. “The Effects of Conglomerate Merger Activity on Systematic Risk.” Journal of Finance, Vol. 25 (09 1970), pp. 795–802.CrossRefGoogle Scholar
[5]Lewellen, Wilbur G. “A Pure Financial Rationale for the Conglomerate Merger.” Journal of Finance, Vol. 26 (05 1971), pp. 521–545.CrossRefGoogle Scholar
[6]Lintner, John. “Conglomerate and Vertical Responses to Market Imperfection: Expectations, Mergers and Equilibrium in Purely Competitive Markets.” American Economic Review, Vol. 61 (05 1971), pp. 101–111.Google Scholar
[7]Mason, R. Hal, and Goudzwaard, Maurice B.. “Performance of Conglomerate Firms: A Portfolio Approach.” Journal of Finance, Vol. 31 (03 1976), pp. 39–48.Google Scholar
[8]Melicher, Ronald W. “Financial Factors Which Influence Beta Variations Within an Homogeneous Industry Environment.” Journal of Financial and Quantitative Analysis, Vol. 9 (03 1974), pp. 321–342.CrossRefGoogle Scholar
[9]Melicher, Ronald W., and Rush, David F.. “Evidence on the Acquisition-Related Performance of Conglomerate Firms.” Journal of Finance, Vol. 29 (05 1974), pp. 141–149.Google Scholar
[10]Melicher, Ronald W., and Rush, David F.. “The Performance of Conglomerate Firms: Recent Risk and Return Experience.” Journal of Finance, Vol. 28 (05 1973), pp. 381–388.CrossRefGoogle Scholar
[11]Neter, John, and Wasserman, William. Applied Linear Statistical Models. Homewood, III.: Richard D. Irwin (1974).Google Scholar
[12]Reic, S. R.Mergers, Managers and the Economy. New York: McGraw Hill (1968).Google Scholar
[13]Smith, Keith V., and Schreiner, John C.. “A Portfolio Analysis of Conglomerate Diversification.” Journal of Finance, Vol. 24 (06 1969), pp. 413–427.CrossRefGoogle Scholar
[14]Smith, Keith V., and Weston, J. Fred. “Further Evaluation of Conglomerate Performance.” Journal of Business Research, Vol. 5 (03 1977), pp. 5–14.CrossRefGoogle Scholar
[15]Weston, J. Fred, and Mansinghka, Surendra K.. “Tests of the Efficiency Performance of Conglomerate Firms.” Journal of Finance (09 1971), pp. 919–936.CrossRefGoogle Scholar
[16]Weston, J. Fred; Smith, K. V.; and Shrieves, R. E.. “Conglomerate Performance Using the Capital Asset Pricing Model.” Review of Economics and Statistics (11 1972), pp. 357–362.CrossRefGoogle Scholar