Disentangling Value: Financing Needs,Firm Scope,and Divestitures |
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| Affiliation: | 1. From the Endocrine Institute, Rabin Medical Center, Beilinson Hospital, Petah Tikva, Israel;2. Department of Pathology, Rabin Medical Center, Beilinson Hospital, Petah Tikva, Israel;3. Endocrine Institute, Assaf Harofeh Medical Center, Zriffin, Israel;4. Sackler Faculty of Medicine, Tel Aviv University, Tel Aviv, Israel.;1. Department of Pathology, Tianjin Medical University General Hospital, Tianjin, PR China;2. Department of Nuclear Medicine, Tianjin Medical University General Hospital, Tianjin, PR China;3. Department of Pathology, Tianjin First Center Hospital, Tianjin, PR China;4. Department of General Surgery, Tianjin Medical University General Hospital, Tianjin, PR China;5. Tianjin Key Laboratory of Lung Cancer Metastasis and Tumor Microenviroment, Tianjin Lung Cancer Institute, Tianjin Medical University General Hospital, Tianjin, PR China;6. Department of Endocrinology, Tianjin Medical University General Hospital, Tianjin, PR China;7. Department of Nuclear Medicine, Second Affiliated Hospital of Zhejiang Medical University, Hangzhou, PR China;1. Montanuniversität Leoben, Lehrstuhl für Geophysik, Paläomagnetiklabor Gams, Gams 45, A-8130, Frohnleiten, Austria;2. LVR - Amt für Bodendenkmalpflege im Rheinland, Außenstelle Xanten, Augustusring 3, 46509, Xanten, Germany |
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| Abstract: | This paper presents a rationale for divestiture consistent with one of the reasons frequently cited by divesting firms, namely, that the firm is undervalued and splitting the firm into its component businesses will make it easier for the market to value the components accurately. When firms are undervalued due to unobservability of divisional cash flows, they may resort to divestiture to raise capital while overvalued firms will use external equity. Diversification thus might result in costly future divestiture. Firms trade off this expected cost of diversification against the benefit of higher levels of cheaper internal capital in deciding the scope of the firm. Journal of Economic Literature Classification Numbers: D82, G34, L22. |
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