Can Diversification Create Value? Evidence from the Electric Utility Industry

Charles A. Dice Center Working Paper No. 2005-7

47 Pages Posted: 30 Mar 2005

See all articles by Tomas Jandik

Tomas Jandik

University of Arkansas - Sam M. Walton College of Business

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 17, 2004

Abstract

Despite SEC and state-level resistance, and contrary to the trend pursued by other firms, many electric utilities have diversified into non-electric and unregulated businesses. Moreover, this failure to focus has been rewarded with higher firm values, again contrary to the discounts documented in the literature for other diversifying firms. Prior literature has questioned whether these premiums (or discounts) can be attributed to diversification per se. Rather, these premiums could arise from the characteristics of the diversifying firms, which have then endogenously chosen to diversify. In a new approach, where regulation can make the diversification decision largely exogenous, we examine the investment policies of the comparable electric-segments in the diversifying and non-diversifying utilities. We find that single-segment electric utilities over-invest compared to diversifying utilities, which explains their diversification premiums and implies that diversification can create value by opening up new investment opportunities.

Keywords: Diversification, electric utilities, internal capital markets, regulation

JEL Classification: G31, G34, L94

Suggested Citation

Jandik, Tomas and Makhija, Anil K., Can Diversification Create Value? Evidence from the Electric Utility Industry (December 17, 2004). Charles A. Dice Center Working Paper No. 2005-7, Available at SSRN: https://ssrn.com/abstract=679039 or http://dx.doi.org/10.2139/ssrn.679039

Tomas Jandik

University of Arkansas - Sam M. Walton College of Business ( email )

WCOB 302
Fayetteville, AR 72701
United States
479-575-6147 (Phone)

Anil K. Makhija (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

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