Tobin’s q, RoA, Diversification and Risk

This study aims to explain the link between corporate diversification, firm performance and risk. To test the research hypotheses, a sample of 63 companies listed in Tehran Stock Exchange over the period 2008-2012 was taken. We construct two models with Tobin’s q, RoA, Size, Debt, Growth and Standard deviation of stock returns. Analysis of the research models is based on panel(data) analysis. In these models the presence or absence of effects models (fixed or random) is reviewed and finally the best model is estimated. Inference is based on significant level or p-value, thus likely that any value or significance level of the test is less than 0.05 is rejected at the 95 percent confidence level. The results indicate that there is no significant relationship between diversification strategy, firm performance and risk.


INTRODUCTION
Diversification is one significant method that firms use to maintain their competitiveness and enhance their profitability. Firms seek diversification strategy in order to achieve value creation through economic of scope, financial economies, or market power (Chen and Yu, 2012). Since the 70th the academic research tried to check the relation between diversification and firm performance (Kahloul,2010). Previous studies showed different foundings about the relation between diversification and firm performance. Some studies found a negative relation between diversification strategy and performance(e.g., Berger and Ofek,1995;Wernerfelt and Montgomery, 1988; Martin and Sayrak,2003) while others found a positive relation(e.g; Maksimovic and Phillips, 2007;Villalonga,2004). The diversification strategy constitutes a field of investigation for management risk researches (Kahloul,2010).It's often perceived by both practical and academicians that corporate diversification always reduces firm risk. However, the literature contains little empirical evidence on the important of corporate diversification on firm risk (Anderson et al.,2011).

THEORETICAL BACKGROUND
The theme of the diversification-performance relation, probably one of the most studied in the literature, is yet far from being exhausted (Palich and al, 2000). Since the 70th the academic research tried to check the relation between diversification strategy and firm performance. Nowadays, the problematic of the firm activity perimeter evolution is an interesting subject so much in industrial economy, in strategy or in finance.
Researches show that some factors have been caused the trend toward diversification during 1960 and 1970. Studies indicate that diversity in companies cause to reduce internal management costs. Rapid growth of management science led to this idea that extract of management is not employing experimental knowledge of one specific industry, but to apply the tools and principles of management. Overall at the global level management principles suggest that professional management can control different companies in financial terms. Subsequent research indicates companies during 1980 and 1990 have again have turned into centralization. Studies show that factors such as increased volatility and turmoil in the industry, managers' centralization to increase share value, to accommodate growth and the emergence of new ideas about the management of the company, has been caused refocusing the company.
The present paper is interested to the double impact of the performance and risk. In Lang and Stulz (1994) and Kahloul and Hallara (2010) an objective continuous measure of the strategic diversity of the firm based on the Herfindahl index has been used. In the present work, we also use the Herfindahl index. Our work is concentrated on panel modeling analyses.

LITERATURE REVIEW
The literature of corporate diversification and the puzzle surrounding whether diversification gives rise to discount or premium, was previously surveyed by three prominent articles: Martin and Sayrak (2003), Stein (2003) and Maksimovic and Phillips (2007). Martin and Sayrak (2003) survey the literature on corporate diversification through two separate channels: cross sectional studies of the link between corporate diversification and firm value on one hand and longitudinal studies in patterns of corporate diversification through time on the other. Their survey suggests that diversification discount may not be the result of corporate diversification after all. In contrast, diversification discount may result from measurement issues or simply because of sample bias. Stein (2003) studies the strand of literature which questions the efficiency of corporate investment in the presence of asymmetric information and agency problems. His focus was mainly on the literature, which addresses the issue of efficient capital allocation across firms through external capital markets and within firm allocation of capital through its internal capital market.
Theoretical literature on diversification discount argues that firms diversify in order to reduce risk. Mansi and Reeb (2002) argue in their empirical paper that diversification discount arises due to the risk-reducing tendencies of the conglomerates. They further argue that diversification reduces shareholder value on the one hand but increases the bondholder value due to the reduction in risk. As a result it may be expected that more diversification discount exists in firms with debt as compared to all equity firms. After using the Berger and Ofek (1995) methodology they find a discount of 4.5% in firms with more than average debt levels whereas no discount is found for all equity firms. This result suggests that debt is an important factor in determining firm diversification. They also show that using book values of debt instead of market values of debt for calculating excess value undervalues diversified firms. Finally they try to examine the joint impact of diversification on debt and equity holders. Their results show that diversification reduces shareholder value, increases bondholder value but has no impact on total firm value.
Tobin's q became the most common measure of firm performance after Lang and Stulz (1994). They use three different measures of diversification to compare the q ratio of single segment firms with multi-segment firms for various levels of diversification. The first two measures are Herfindahl indices constructed from sales and assets. The third measure is the number of segments in the firm since more diversified firms have more segments. Lang and Stulz (1994) use crosssectional regressions for each year from 1978 to 1990. They use a dummy variable to estimate the statistical contribution to q of diversification. However, they argue that since this method does not take into account the industry effects, a firm belonging to an industry with low q will automatically

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have lower q irrespective of diversification. This short coming is corrected for by using industryadjusted measures of discount. Berger and Ofek (1995) use asset and sales multiplier14 instead of Tobin's q in order to measure the value effect of diversification. In order to show the possible association between value loss and diversification they estimate pooled regressions using multi-segment dummy and control for firm size, profitability and growth opportunity of the firm. Khanna 2011) reviewed that whether corporate diversification decreases or increases the risk of the diversifying firm is an important empirical question. They investigate this issue using a sample of diversifying acquisitions and various risk measures. They find that corporate diversification tends to decrease the risk of some firms but increase the risk of many others, and on average corporate diversification does not lower firm risk. These findings call into question the notion that corporate diversification strictly reduces firm risk. Raei et al(2015) examined the relation between diversification, performance and risk. They used ROE as a proxy of performance and Herfindah as a proxy of diversification. They found any relation between diversificand with firm performance and risk.

THE PROPOSED STUDY
Based on the developments of the literature, several hypotheses are developed. The first hypothesis is stated: H 1 : There is a significant relationship between diversification strategy and firm performance. The second hypothesis is as follows: H 2 : There is a significant relationship between diversification strategy and risk. In this paper we use Herfindahl index for measure of diversification. The HERFINDAHL coefficient for firm i in year t is calculated as follows: HERF i,t =⅀ (SSALE/SALE) 2 Where: HERF i,t : sales revenue according to HERFINDAHL indicator for firm i in year t. SSale: seles a certain portion of the company Sale: The total sales (i.e., the total sales of parts) HERF variable for one part companies equal to 1. For companies that are more than one part is less than 1. So, the smaller coefficient indicates a greater extent of corporate diversification. Also Tobins'q and ROA as measures of firm performance are as follows: Tobins'q = Total market value of firm/ Total asset value ROA = Net profit/Total assets The risk (STD): The total risk of the firm is estimated from the market data. It is appreciated by the standard deviation of stock returns.

R E T R
Volume 50 In this paper three variables are control variables: The size of firm (SIZE): It is essential to control the size of the firm sample that is supposed to act on the performance. We kept as variable of control the size of every firm measured by the logarithm of the total asset of the group. The growth of the firm (GROWTH): The growth of the company is one of the explanatory factors the most important of the performance of firms. This variable is measured by the average variation of the turnover on the reporting period. That is: The debt (DEBT): The variable of the debt is measured as the ratio of the total debts and the shareholders equity. We choose 63 firms from companies listed in Tehran Stock Exchange. The data used in the testing model is extracted from TSE that provide from 2008 to 2012. The panel model is used in this paper.

The results
As it is mentioned, the sample is composed of 63 companies listed in Tehran Stock Exchange. The methodology for analyzing data is based on panel modeling. In the first, the Herfindahl index is based on distribution of the sales by activity which allows the definition of the diversification strategy level for each firm. The data being in both time series and cross sectional. We have thus made regression using a panel data. Table 1, hereafter resumes the descriptive statistics of the variables on the whole period (2008-2012): mean, median, maximum, minimum and standard deviation. The diversification variable is measured by Herfindahl index (HERF). The performance is evaluated by the ROE. The risk is measured by standard deviation of the return equity (STD). The log of total asset measures the size of the firm (SIZE). The (DEBT) variable corresponding to total debt/ total equity, presents the debt of the firm. The growth (GROWTH) is measured by the variation of the turnover of the company. The number of observation is 315.

International Letters of Social and Humanistic Sciences Vol. 50
different years is not normal but the values of these variables logarithm in these years are more than 0/05. So their distribution has been normal and Meaningful value for ROA variable during studied years is more than 0.05.
The results of fixed effect show that probability of significant of F is equal 0.000. This result means that there is a significant model. The coefficient of determination is equal to 0.07. The t-statistics for HERF is equal to 1.56(meaningless), for SIZE is equal to 0.6(meaningless), for DEBT is equal to -4.37(meaningful and negative), for GROWTH is equal to -0.78(meaningless)). The below table shows the results:

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The results of model 1 indicate that there is no significant relationship between Tobin's q and Herfindahl. The supposed model 1 to test the hypotheses is as follow: The results of fixed effect show that probability of significant of F is equal 0.000. This result means that there is a significant model. The coefficient of determination is equal to 0.695. The t-statistics for HERF is equal to 1.676(meaningless), for SIZE is equal to -1.3(meaningless), for DEBT is equal to -0.19(meaningless), for GROWTH is equal to -0.60(meaningless)). The table 6 shows the results:

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The supposed model to test the hypotheses is as follow: The results of random effect show that probability of significant of F is equal 0.901. This result means that there is no a significant model. The coefficient of determination is equal to 0.003. The tstatistics for HERF is equal to -0.51(meaningless), for SIZE is equal to 0.7(meaningless) and for DEBT is equal to 0.45 (meaningless). The below table shows the results: The results of hypothesis 2 indicate that there is no significant relationship between diversification strategy and risk.

CONCLUSION
This paper has examined the relationship between diversification strategy, firm performance and risk. For examined the firm performance, we used Tobin's q and ROA. The results shown that there is no significant relationship between diversification strategy, firm performance and risk.