Cannibalization risk and limited liability: implications for firm valuation and capital budgeting |
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| Institution: | 1. KU Leuven, University of Leuven, Leuven, Belgium;2. Maastricht University, Maastricht, The Netherlands;3. University of Groningen, Groningen, The Netherlands;4. Wageningen University, Wageningen, The Netherlands;1. Lawrence Technological University, 21000 West Ten Mile Road, Southfield, MI 48075, Buell Management Building M325, United States;2. Royal Bank Distinguished Professor of Marketing, Department of Marketing, MB-13-237, John Molson School of Business, Concordia University, 1455 de Maisonneuve boul. WestMontreal, QC H3G 1M8, Canada;3. Royal Bank of Canada Professorship, Strategic Relationship Marketing, Department of Marketing, MB-13-301, John Molson School of Business, Concordia University,1455 de Maisonneuve boul. West, Montreal, QC H3G 1M8, Canada |
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| Abstract: | When two firms combine, the negative cash flows of some projects can cannibalize the positive cash flows of other projects. This may at least partly explain recently documented observations that there is value loss from diversification, value gain from splitting up an existing firm, and that the value loss is higher in the case of diversification into unrelated industries. Also, this may explain why the value and riskiness of an identical project can be different for firms with different assets in place and why the value of a project as stand-alone may be irrelevant for a firm’s investment decisions. |
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