Valuation-driven profit transfer among corporate segments

June 5, 2014 Leave a comment

Rev Account Stud (2014) 19:805–838

Valuation-driven profit transfer among corporate segments

Haifeng You

Published online: 4 February 2014

Springer Science+Business Media New York 2014

Abstract This paper investigates whether the desire to achieve higher equity

valuations induces conglomerates to manipulate their segment earnings. I extend the

Stein (Q J Econ 104:655–669, 1989) model to a multi-segment setting and show that

conglomerates have incentives to transfer profits from segments operating in

industries with lower valuation multiples to those with higher multiples, even if the

market is not fooled in equilibrium. If companies engage in such manipulation,

segments with relatively high (low) valuations should report abnormally high (low)

profits. The empirical tests confirm this prediction and further show that the relation

is stronger for firms with more dispersed segment valuations. This paper also

demonstrates that the simple sum-of-the-parts valuation with multiples tends to

overestimate the enterprise values for conglomerates and that the measurement

errors increase with segment valuation dispersion.

Filed under Investing Process

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment