Essays on the role of endogeneity and measurement error in estimating the consequences of diversification, refocusing, and cash holding policies of the firm.

摘要

The first chapter investigates the factors affecting firm's refocusing and/or diversification decisions, and the valuation consequences of these decisions. We estimate these factors using a model of multiple choices. We find that diversification occurs generally due to factors associated with industry and economic conditions, and refocusing primarily due to firm-specific reasons. In addition, we explicitly model and estimate refocusing and diversification effects on excess value in the same valuation equation. The advantages of including refocusing as an explanatory variable in the valuation equation, together with diversification, is analogous to the advantages of estimating a multiple regression instead of a simple one. We control for the simultaneity issue through the utilization of 2SLS. Our results indicate that there is no valuation gain or loss due to diversification or refocusing actions, per se.; Chapter 2 reexamines the recent empirical studies that find improvements in various measures of investment efficiency following a divestiture or a spin-off. We observe that if a firm divests or spins off segments, it chooses to do so; the firm is not picked out of the population of diversified firms at random. Further, most measures of investment efficiency involve Tobin's q, which is a very noisy proxy for investment opportunities. We scrutinize these findings by using two different econometric techniques: one that remedies the endogeneity problem in these before-and-after experiments, and other that remedies the measurement-error problem. We find no evidence of significant change in investment efficiency when we treat the endogeneity and measurement-error problems.; Chapter 3 discusses the issue of cash flow sensitivity of cash for constrained and unconstrained firms when one corrects for the measurement error in Tobin's q. A recent study by Almeida, Campello, and Weisbach (2003) finds that cash flow does not influence the cash holdings of financially unconstrained firms. We demonstrate that high measurement error in q proxies is significant enough to affect their result. Moreover, our measurement-error-consistent estimation results show that higher levels of cash flow significantly decrease the demand for liquidity. This suggests that high cash flow can substitute for cash and thus, can diminish the importance of holding cash reserves.