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Covid-19: Corporate diversification and post-crash returns
1Queen's Management School, Belfast, BT9 5EE, UK.
Finance Research Letters
|October 25, 2021
Summary
Corporate diversification negatively impacted stock returns during the Covid-19 crash. However, diversified firms with a premium showed better performance and faster recovery than those at a discount.
Area of Science:
- Finance
- Economics
- Business Strategy
Background:
- The Covid-19 pandemic caused a significant market crash, impacting corporate performance.
- Corporate diversification strategies are common, but their effectiveness during crises is debated.
Purpose of the Study:
- To investigate the effect of corporate diversification on stock returns during and after the Covid-19 market crash.
- To analyze how diversification premium or discount influences firm performance in crisis situations.
Main Methods:
- Regression analysis to assess the relationship between diversification and stock returns.
- Survival analysis to evaluate the speed of stock price recovery.
Main Results:
- Diversified firms generally underperformed focused firms, exhibiting worse stock returns and slower recovery.
- Firms trading at a diversification premium demonstrated superior returns and quicker recovery compared to those at a discount.
Conclusions:
- Corporate diversification can be a liability during market downturns like the Covid-19 crash.
- The market valuation of diversification (premium vs. discount) significantly moderates its impact on stock performance during crises.
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