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Diversification Discount on Firm Value

Name

University

Date
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Table of Contents
ABSTRACT....................................................................................................................................3
CHAPTER I: INTRODUCTION....................................................................................................4
1.1 Research questions.................................................................................................................5
1.2 Contribution...........................................................................................................................6
1.3 Structure of thesis...................................................................................................................6
CHAPTER II: LITERATURE REVIEW........................................................................................7
2.1 Effects of diversification discount on firm value...................................................................8
2.1.1 Cross-sectional studies....................................................................................................8
2.1.2 Event studies....................................................................................................................9
2.2 Explanations/reasons for the diversity discount value effect.................................................9
2.2.1 Value reducing................................................................................................................9
2.2.2 Increasing of the value..................................................................................................11
2.3 Related vs. unrelated diversification....................................................................................12
2.3.1 Benefits related diversification......................................................................................12
2.3.2 Costs related diversification..........................................................................................13
2.4 Financial crisis, the value of the diversification discount....................................................13
CHAPTER III: HYPOTHESIS......................................................................................................14
3.1 Diversified firm trade at a discount......................................................................................14
3.2 Valuation effect on diversification.......................................................................................15
3.3 Valuation effect recent financial crisis (2007-2009.............................................................15
CHAPTER IV: METHODOLOGY...............................................................................................17
4.1 Choice of method.................................................................................................................17
4.2. Excess value method...........................................................................................................18
4.2.1 Imputed value................................................................................................................18
4.2.2 Modifications.................................................................................................................18
4.3 Data......................................................................................................................................20
CHAPTER V: RESULT & DISCUSSIONS.................................................................................21
5.1 Descriptive Statistics............................................................................................................22
5.2 Excess values.......................................................................................................................24
5.2.1 Regressions....................................................................................................................24
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5.3 During the financial crisis, the need of corporate diversity was highlighted.......................25
Increased excess values conglomerates during crisis.............................................................25
Reduced excessive conglomerates during crisis....................................................................26
CHAPTER VI: CONCLUSION....................................................................................................27
APPENDICES...............................................................................................................................29
A: sampling:...............................................................................................................................29
B: Sample breakdown................................................................................................................29
C1: Excess Values......................................................................................................................30
C2...............................................................................................................................................30
D: Regressions...........................................................................................................................31

ABSTRACT
This study examines the impact of diversification discounts on the corporate value of German.
The diversified German conglomerate has a high relative value of 5 percent compared to the
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related diversified conglomerates. In addition to the difference in valuation effect between

connected and unconnected variances, this work determines whether corporate diversification
generally reduces value or adds value, and this valuation effect has been recent. It contributes to
the literature by directly examining whether it was a more or less prominent in Financial Crisis
(2007-2009). We also found that the German conglomerate traded at a relatively low level of
20% on average compared to the independent conglomerate. This finding supports some
literature that claims that diversified companies are trading at discounted prices compared to
independent companies. We have discovered that the current financial crisis during the period of
2007 to 2009 might have beneficial and negative effects on German corporation value (related
and unrelated). Regardless of the approach used to estimate the relative value of equally
diversified standalone enterprises, Germany may be comparatively high or low in value
concerning standalone conglomerates.
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CHAPTER I: INTRODUCTION

Diversification discounts and their impact are popular in literature and are well-discussed topics.
They are generally divided into three categories, not all impact (Berger & Ofek, 1995) or a fixed
value of the effect of diversification of companies (Bryce & Winter, 2009). Overall, be aware
that there is no consensus on whether enterprise diversification values have increased or
decreased. Variable discounts can also be classified into various types. For instance, there is a
diversification discount (Barney, 1991), which can be domestic or worldwide (or "global"), and
the company's diversification can be similar sector (related) or wholly distinct industries (Bryce
& Winter, 2009) are specific types of variance and multiple. It suggests that there are multiple
ways to investigate the impact of a company-specific factor.
Financial Administration Graduated graduation topic is a topic of the influence of diversification
discounts for the most attractive fixed value. Recently many companies are diversified.
However, if diversifying discounts finally, will it lead to an increase in fixed value? Companies
are diversified, and there are many studies if this diversification increases or destroys fixed
values. There's also debate about whether quantifying the influence of a company's diversity on
fixed assets is accurate or skewed (Bryce & Winter, 2009). In the context of business executives,
it's critical to understand whether particular diversification tactics are viable in terms of pursuing
fixed-value developments and maybe relying on internal variables. As a result, it is useful to
have (more) significant information on the influence of corporate diversification on the
business's value for a specific firm. This data may be used to make better selections regarding
discounts on varied assets.
This thesis evaluates the diversification discount on firm value (Germany). On the other hand,
will diversifying discounts result in a rise in fixed value? Companies are diversified, and
numerous researches have been conducted to determine whether diversification enhances or
decreases fixed values. There's also a debate about whether measuring the impact of a company's
diversification on fixed assets is accurate or skewed (Bryce & Winter, 2009). In the case of
corporate executives, it's critical to understand whether particular diversification tactics are
worthwhile in pursuing fixed-value increases and whether or not they rely on some internal
elements).
I reported that the relative value of German, leveraging data from 2005 to 2013, found support
for such assumption that diverse firms- trade is at a discount. Secondly and third, The financial
crisis from 2007 up to 2009 in my opinion, had both good and bad consequences on corporate
value. The data sample used in this thesis appears to be the main limitation: a bigger data sample
(especially from the Netherlands) and maybe better classification of whether a business is linked
or unrelated diversified could contribute to yet more precise and accurate conclusions. The lack
of additional empirical evidence on the association among surplus values of diversified and
standalone enterprises are another weakness of this argument).
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1.1 Research questions

The study for this thesis is focused on publicly traded German companies. The basis for this
decision is that Germany is Europe's largest economy (Campello, Graham, & Harvey, 2010) and
has many companies engaged in diversification operations.

RQ1: Does diversification discount affects a firm's value?

RQ2: How much effect did the current financial crisis happened in 2007 to 2009 have on the
disparity in firm value among diversified versus standalone firms?

1.2 Contribution
There has to be an agreement on whether the diversification discount stops or creates corporate
value. Campello, Graham, & Harvey (2010) use European and UK data, correspondingly, to
suggest that it is still unclear regardless of whether business diversification damages or creates
firm value. As part of my research, I'll look at the influence of corporate diversity on firm value
using German data and the effects of diversification discounting on German firm value.
According to literature, Germany was impacted by the financial crisis (2007-2009), albeit lesser
than other European countries (Ammann, Hoechle, & Schmid, 2012). I consider contributing to
this body of knowledge by determining whether there are significant variations in firm valuation
by comparing Germany and the Netherlands to see if the findings of Akbulut & Matsusaka
(2010) are validated.
The second phase of the research looks at how the financial crisis in 2007 to 2009 affected the
value of diversified (including related and unrelated) and standalone enterprises. According to
previous research, diversified enterprises have more substantial internal financing options and
may have an advantage in a credit-constrained situation. It has been observed in the literature
that diversified companies from the US and worldwide sample had a slight decrease in company
value over time, mostly during financial crises, as opposed to sole proprietorships (2007-2009).
Apart from these findings, there is no research (as far as I am aware) that focuses only on
German on the influence of the financial crisis on corporation values, making this study unique.
In a credit-constrained climate, decentralised firms have more options for internal financing than
independent enterprises. It is proportional to the number of disconnected segments (Chatterjee &
Wernerfelt, 1991). These findings also raise the question of whether there was a disparity in
company valuation between connected and unrelated firms during the recent financial crisis of
2007-2009. However, there has been no comprehensive examination of the variation in corporate
value among related and non-affiliated corporations (as far as I am aware), particularly during
the recent financial crisis from 2007 to 2009. If there is literature on this subject, it is unlikely to
be limited to German corporations. As a result, the third novel component is an analysis of the
key variations in business evaluations of connected and unrelated enterprises among Germans.

1.3 Structure of thesis

The remaining chapters of this work have been organised as follows: Chapter 2 outlines the
literature to give you a good knowledge of corporate diversification. Examine the rationale
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for recognising the impact of corporate diversification on corporate value and distinguish

literature based on relevant discounts and diversification discounts. Previously discovered
material on the impact of the financial crisis on corporate value is at risk. In Chapter 3, a
hypothesis is made. These hypotheses have been taken up and substantiated by findings from
literature studies.
The procedure is described in Chapter 4. To support the model utilised for the study, this paper
discusses the various models and their merits and disadvantages. The qualities and specifications
of information use are described in Chapter 5. This chapter presents the data, discusses the
statistics, and gives a thorough review of the data. Chapter 6 summarises the conclusions of the
data analysis and discusses the most significant discoveries, as well as their validity. Chapter 7 of
the last chapter concludes the results found, explains the limitations, and makes assumptions to
explain the results found.
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CHAPTER II: LITERATURE REVIEW

The following literature will be studied because the focus of this thesis is on the valuation
consequences of diversification discounts on business value:

2.1 The impact of a diversification discount on a company's value

2.2 Explanations/reasons for the diversity discount value effect

2.3 Diversification: related vs. unrelated

2.4 Financial crisis (2007-2009), the value of the diversification discount

2.1 Effects of diversification discount on firm value

Much of the literature on diversified discounts deals with the impact/impact on goodwill. As
explained in Section 2.1, there is still no consensus on whether diversification discounts will
destroy or create corporate value, except for the incentives for companies to pursue
diversification activities. Numerous studies (Chatterjee & Wernerfelt, 1991) investigated the
impact of diversified discounts on corporate value by comparing the value of companies with the
same focus as diversified companies. Most of these studies imply that diversification operations
lose value on average (Claessens, Djankov, Fan, & Lang, 1998), yet firms are companies.
According to several studies, diversification actions boost value (Chatterjee & Wernerfelt, 1991).
According to literature evaluations, company diversity is not the main factor generating varied
discounts and premiums. The influence varies depending on the industry, governance structure,
and economic conditions (Chatterjee & Wernerfelt, 1991). To examine the influence of discounts
on diversified firm value, two methodologies are widely used: cross-sectional studies and event
studies (Dhandapani & Upadhyayula, 2015).

2.1.1 Cross-sectional studies

Fauver, Houston, and Naranjo (2003) examine Tobin's Q for both diversified and independent
firms to determine diverse investment discounts for diversified companies relative to a portfolio
of equivalent single-segment enterprises. This savings was significant even after accounting for
R&D expenses, firm size, and provision of financial sources. Gillan & Panasian (2013) also
discovered a distributed discount on a global sample of distributed companies. As a result,
diversified operators are traded at a discount of 1315% compared to single segment enterprises.
When a company engages in the aforementioned independent diversification activities, it loses
more value. Diversification operations have been shown to affect businesses in various
additional research conducted in different countries and periods. Using a UK sample, George &
Kabir (2012) identified a large decentralised discount on conglomerates. Glaser & Müller (2010)
found comparable results in continental European countries, concluding that there are discounts
on diverse investments except Germany. The outcome for this country is still up in the air. Some
studies have looked at the US market and found that diversification discounts are significant. For
example, Greenglass, Antonides, & Christandl (2014) found a 12% diversified investment
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discount on the US sample from 1992 to 1997. However, most studies (Graham, Lemmon, &
Wolf, 2002.) use global samples with similar sampling requirements as Hann, Ogneva, & Ozbas
(2013). One of these studies is by Greenglass, Antonides, & Christandl (2014). We found a
diversified discount of about 11% in the global sample from 1978 to 2005. Other studies focus
only on Asian companies. A study by George & Kabir (2012) and Gillan & Panasian (2013)
found significant discounts of 14% and 16%, respectively, for a sample composed of companies
in the Asian economy.
In addition to diversification discounts, cross-transparent studies that do not notice signs due to
companies diversifying (Dhandapani & Upadhyayula, 2015) (Fauver, Houston, & Naranjo
(2003) or Important Diversity Even bonuses (Hautz, Mayer, & Stadler (2013). FAUVER aet al.
(2003) discovered that the excessive value of the emerging market diversified enterprise is zero
or sometimes positive. The difference between the development of capital markets and investor
protection (in emerging markets) means that the value of diversification can be essentially
different from the countries. An important diversification bonus is Gillan & Panasian (2013). A
15-year survey of global samples from 38 countries has brought significant premiums to
diversified companies in emerging markets. Diversified companies have better internal financing
opportunities in the face of capital market conflicts. Discuss that it has an advantage over an
independent company. On the other hand, however, Hoechle, Schmid, Walter, & Yermack
(2012) discovered that diversified firms in industrialised nations lose corporate value in
comparison to isolated enterprises, resulting in diversification discounts.

2.1.2 Event studies

You can also find out how the stock market reacts to a company's decision to (further) diversify.
The main ideas of these studies is to trade diversified companies at a discounted price compared
to what they are worth if they are split into separate entities with a single segment. See Hann,
Ogneva, & Ozbas (2013) for empirical evidence of a positive reaction to a diversified corporate
restructuring. Meanwhile, some studies (Schmid, Walter, & Yermack, 2012) have found
empirical evidence that the stock market responds positively to corporate diversification
movements. Chevalier (2004) argues that event returns are higher when diversification
movements are involved, while Greenglass, Antonides, & Christandl (2014) are significant for
diversification returns unrelated to related diversification movements. When undertaking event
investigation, there is no consensus upon whether the diversification process destroys or
produces a fixed value.

2.2 Explanations/reasons for the diversity discount value effect.

This chapter discusses the literature-based grounds behind the discovered diversity
discount/premium. The literature justifications will be classified as either value decreasing or
value boosting.

2.2.1 Value reducing

The main drivers of value reduction can be split into three categories, each of which has been
addressed in greater depth because they are the most prominent in the literature.
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Risk-reducing effect
Berger & OFEK (1995) has more evidence that companies are diversified than diversified
companies. In addition, they also found evidence that beats between diversified company
segments degraded the total value of diversified companies. Hoechle, Schmid, Walter, &
Yermack (2012) found the same result and discussion.

Another risk reduction effect is Hund, Monk, & Tice (2010): Manager claims that managers are
integrated into diversified companies and credits and reduce the risks fixed at shareholder
expenses. As a result, positive NPV projects are ignored or skipped, reducing the market value of
the stock, which in turn reduces the overall corporate value of the diversified company and
results in a diversified discount.

Agency conflicts
Hund, Monk, & Tice (2010) indicate that managers' pursuit of private utility argues that it is an
important driving force for discounts on diversified investment. On average, they argue that
executive compensation tends to be positively correlated with company size. For example,
managers can benefit privately in the event of diversification. It means that managers can get
better career prospects or higher salaries if they run a more diversified company. According to
Hund, Monk, & Tice (2010), this may mean that diversification strategies are pursued by
managers for the inherent private interests associated with them, even if they have no added
value.

Diversification may lower the risk of the manager's relatively undiversified personal portfolio in
terms of the manager's interests, unless the cash flows of separate segments are entirely
connected (Hund, Monk, & Tice, 2010). In general, if private interests exceed managers' private
costs, the company may pursue diversification strategies that reduce the value, which can lead to
agency conflicts (Hoechle, Schmid, Walter, & Yermack, 2012).

Biases in valuation methodology

Most of the valuation literature claims decentralised companies are trading at discounted prices.
In addition, some of these works (Hoechle, Schmid, Walter, & Yermack, 2012) note that there
are concerns about the evaluation method itself. Some articles claim a sample selection bias
(Hund, Monk, & Tice, 2010), while others (Hund, Monk, & Tice, 2010.) bias the accounting
impact used to calculate diversified haircuts. In particular, debt book value is an overlapping
subject in several articles claiming that debt book value use introduces a bias Doukas & Kan
(2006). Accounting company effect calculations lead to diversification of goodwill. This bias
stems from the assumption that diversity lowers company risk. It is the outcome of a decrease in
shareholder value as well as a rise in bondholder value, with the significance of shareholder
value varying depending on the business's leverage (Mansi & Reeb, 2002). Equity (i.e.,
goodwill) losses behave as fixed leverage, according to Doukas & Kan (2006), and
diversification discounts do not apply to allies. As a result, they argue that calculating excess
value through using book value of debt contributes to a decreasing trend for all diversified equity
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corporations.
Works by Doukas and Kan are also included in the literature (2006). They also claim that
determining corporate value based on the book value of undervalued debt is a diverse
corporation as opposed to a concentrated firm, citing an early research by Hund, Monk, and Tice
(2010). Hund, Monk, and Tice discuss this theory in a similar manner (2010). Diversification
decreases company risk by aligning business entities with entirely uncorrelated cash flows.
Reduced company risk boosts bondholder value at the expense of shareholder value, according to
the debt pricing theory. As a result, incorporating a liability's book value in a business's valuation
actually reduces the firm's real worth. Doukas & Kan (2006) Moreover, the function of the
estimate approach utilised in the excess valuation must be studied, according to the authors. They
claim that, in addition to substituting book values with market debt amounts, these estimating
methodologies might result in a skewed diversification discount.
Concerning the disclosed accounting data, CuPustwamy aet al. (2005) argue that some of the
diversified investment haircuts can be explained by biased accounting implications to calculate
added value. In addition, CuPustwamy aet al. (2005) argue that different accounting standards
for calculating value-added lead to different values of diversified discounts, thus leading to a
lack of comparability between companies.
Jiraporn, Kim, Davidson, & Singh (2006) conclude that Tobin's Q-based diversified investment
haircut measurements are upwardly biased by M & A accounting impact. When goodwill is
subtracted from an asset's book value, a large percentage (but not all) of the dispersed haircuts
projected using q-based metrics is removed. Furthermore, they argue that M&A bookkeeping has
no effect on the market-to-sales ratio and hence does not cause bias.

2.2.2 Increasing of the value

Regarding value-decreasing effects, significance influences may be divided into main drivers,
that will be researched in more depth and they're the most prevalent in the literature.

Institutional factors
Jiraporn, Kim, Davidson, & Singh (2006) explicitly address the impact
of organisational characteristics on fixed values throughout the case of diversification (2012).
The latter contributed to this discussion by looking into the role of institutional elements on
diversity value. They look at the impact of various institutional elements at the national level on
diversity value. Their objectives are to see if national labour force friction influences the
relatively fixed value of capital and market share. They have found that the diversified enterprise
related to song legs colleagues with small capital and labour markets are high. These survey
results are more advantageous in the presence of internal capital distribution in an external
capital market, and this diversification is consistent with the argument that it may be
advantageous in the presence of labour market friction. It is to find it in Jiraporn, Kim, Davidson,
& Singh (2006). If economic and legal environments make features with other companies more
difficult, merge affiliates in the same organisation as they need to be operated on other
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independent criteria. It claims that it may be more beneficial. Diverse businesses in these
countries may also attract competent workers and influence political and regulatory systems.

Financial reporting/Data
According to Jiraporn, Kim, Davidson, and Singh (2006), component data might be a provider of
diversification discounts. Using more thorough data provided a diverse benefit, according to
Jiraporn, Kim, Davidson, and Singh (2006). According to Davidson and Singh, data might be a
varied rebate driver (2006). Its research discovered that they had a more varied Australian
company than their stand-alone counterparts, so they decided to look at the link between
corporate governance/executive compensation and diversification value. Kochhar (1996) claims
that this premium may be justified (partially) by sampling procedure and other forms of
diversification, all of which are based on Kochhar's theory (1996).

2.3 Related vs. unrelated diversification

Related diversification appears to be more advantageous than unrelated diversification,
according to Davidson & Singh (2006). You might apply your current talents and resources to
other connected businesses that are part of your overall business. Related diversity, as opposed to
unconnected diversification, can be advantageous to firms, according to Berger & Ofek (1995).

 Related diversified companies can more easily gain a (sustainable) competitive advantage
through the better transfer of skills and resources.
 When segments are connected, it is easy to choose a winner in the internal capital
markets of various companies.

One of the first to claim that business diversity reduces corporate value was Berger & Ofek
(1995). They looked at both linked and unrelated variations and discovered that unrelated
variances had higher negative influence on enterprise variances. According to their findings, a
company's divisions are categorised as unimportant if they do not share some common two-digit
SIC code. Otherwise, they are classified as related. After further literature research, the
difference in benefits and costs between connected and unconnected diversification will become
apparent. Knowing earnings and expenditures can assist explain the difference in goodwill
among linked and unrelated diversification due to firm expansion.

2.3.1 Benefits related diversification

Berger & Ofek (1995) claims that there is a benefit of relevant diversification of non-adjacent
diversified economic circumferential products, which generates resource-based views (RBV) and
transaction cost economy (TCE) increase. As per on these theories, other diversification is
insufficient or eliminated, proving expensive to requires stronger learning (Krishnaswami &
Subramaniam, 1999). Passage passes can also be divided into two subcategories. Synergistic
effects and convergence (Sakhartov & Ferta, 2014). Conversion points to the fact that relatively
diversified companies have the opportunity to implement resources from one product market to
another. The the relevant diversified companies can reduce the deployment costs needed to
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maintain employees, facilitate equipment and equipment adaptation, and apply them to the
alternative market. Therefore, the value-added mechanism behind synergies and relocations is
resource sharing and resource use. Furthermore, according to Kumar (2013), connected
diversified enterprises can build synergy by sharing resources among companies with similar
resource needs.

2.3.2 Costs related diversification

One advantage of related diversification is perspective economies: the main business can support
related divisions with resources such as knowledge and people capital (Berger & Ofek, 1995).
However, when there has been a significantly larger primary business, such benefit might have a
negative side, as a primary business tends to have higher power and influence due to its size
(Kumar, 2013). Internal (between organisations inside this firm) and external (with consumers
and partners) operations can use by the primary business to exercise dominance over the
connected segments in ways that benefit the core business rather than the related segment
(Kumar, 2013).
Zhou's research also mentions coordination costs as negatively linked to diversification (2011).
Remembering that related diversification's (possible) synergies can be beneficial, Kumar, 2013)
believes that a firm must effectively monitor and regulate the dependencies between the various
lines to realise these synergies, resulting in higher coordination costs. Whenever a firm's
dependencies are complicated, coordination costs may rise faster than the advantages gained
from diversity, resulting in a limit on the degree of effective diversification.

2.4 Financial crisis (2007-2009), the value of the diversification discount

According to HAN et al. (2013), the internal capital market is a motivator for firm
diversification, and the effect of corporate actions is influenced by the state of the economy. New
debt fell by about half during the height of the current financial crisis versus the prior quarter
(Kumar, 2013). Also, Kumar (2013), in the financial restriction conditions, it turned out that
companies can limit investment opportunities if they cannot borrow external capital. Such
insights suggest that during economic competition, the company has increased corporate profits
that companies have larger developed internal capital markets. Diversified businesses frequently
have more internal resources and don't need to rely on outside finance (Kumar, 2013). According
to Hann et al. (2013), businesses have a broad portfolio that is similar to that of normal
businesses. Furthermore, they suggest that diverse enterprises with reduced correlation cache
flows have cheap capital costs. They observed that the department's cache flow correlation is
directly connected to the cost of capital reduction. Furthermore, HAN et al. (2013), a diverse
corporation with additional economic constraints, claim that reciprocated insurance benefits
them because they have some external financing losses.
Furthermore, because resources are assigned, the selection of management limits the degree of
diversification of organisations. The type of debt affects the implicit benefits of commercial
diversification. In particular, the kind of debt also affects the assumed benefits of commercial
diversification and, in general, the advice/support for obtaining opinions. As a result, it will be
14

fascinating to examine if the value of diversity has been influenced greatly (significantly) also
during recent financial crisis. The extraordinary financial richness of diverse firms' surplus value
is explained by Laeven & Levine (2007). They believe that throughout the financial crisis, the
value of diverse enterprises surged dramatically, resulting in diversified decorating during
current financial difficulties. A study by HAN et al. supports the idaea that the relevance of
business diversity in the present economic crisis leads to enhanced corporate value (2013).
According to Volkov & Smith (2015), two more detailed commodities related to internal capital
requirements are broader plutocracy and competent plutocracy effects.
Empirical evidence of growth within the relative costs of various companies during a financial
recession [i.e., the recent financial crisis has also been determined with the help of HAN aet al.
(2013). In line with this, it claims that it could be due, especially to the green internal capital
markets. It also discovered more evidence that the most notable development within the scope of
the relative evaluation was attributable to enterprises that were fiscally conservative at the start
of the crisis. The fact that these enterprises have significantly less access to external funding
possibilities and rely largely on internal capital markets is a logical justification for their
location. The current currency crisis appears to have lowered organisational expenses, according
to empirical findings (increased diversification discounts). This localisation contradicts the
findings of Kuppuswamy et al. (2010). The rationale for the impact of this
poor organisational fee, according to Dae Los Angeles Eisenhardt (1989), is as follows:
Reducing leverage through the use of diverse companies may result in growth costs due to cross-
subsidisation and overinvestment, weakening the performance benefits of corporate
diversification inside and outside credit-a constrained environmental reason. Increase the sub-
average estimated variance discounts as well.

CHAPTER III: HYPOTHESIS

3.1 Diversified firm trade at a discount

There are several reasons why a diversified company that is not related to a diversified company
can cause it to trade at a discounted price compared to an independent company. The two most
prominent sources are Agency's conflict risk reduction effect. Hence, agency conflicts are a
popular reason. The theory is that there may be a conflict of interests
regarding decentralisation decisions between the agent (company manager) and the agent's
principal (i.e., shareholders), and the potential for goodwill by selfish managers who do not act
for the benefit of the company. It claims that it can cause a loss (Kuppuswamy et al. 2010). The
work by Denis et al. provides empirical support (2002). The author of this study claims that a
company's industrial (i.e., discontinuous) diversification diminishes its corporate value. They
conclude that irrelevant diversity lowers the company's overall worth due to the Agency's cost,
whereas refocusing it raises its value. According to Kuppuswamy et al. (2010), these agency
problems are created indirectly by poor shareholder rights and are the primary source of diverse
firms' damage. The following is the explanation for this discovery: If investors' rights are
15

inadequate, agency costs resulting from the ownership and control might be more severe,
resulting in (increasing) loss of organisational value. In addition, Lee & Hooy (2012) explanation
of agency theory has found evidence that industrial (i.e., irrelevant) is stronger than global
diversification.
Further empirical support can also found in Kuppuswamy et al. (2010). They argue that risk
mitigation benefits such as overinvestment and cross-subsidisation are important drivers of
diversified discounts on all types of diversified investments. Such risk mitigations may result in
cash being misallocated and (business) value-enhancing projects being abandoned. Therefore,
these risk mitigation measures can be the driving force behind the negative valuation effect of
corporate diversification.

H1: When compared to comparable standalone enterprises, diversified firm trade at a discount.

3.2 Valuation effect on diversification

Theoretically, irrelevant diversification lowers corporate value more than related diversification.
It is because relevant diversification has the general advantage of being irrelevant or irrelevant to
irrelevant diversification from economies of scope perspective. Sharing resources between
companies with similar resource requirements can create synergies between varieties of related
companies. Kuppuswamy aet al. (2010) found empirical support for this debate and found
evidence that these synergies lead to disconnected diversification and lower enterprise value than
connected diversification. The ability of associated diversified enterprises to redistribute
resources from one market industry to another (related) product market is referred to as
redistribution capability (Rudolph & Schwetzler, 2014). Relevant diversification decreases
enterprise value more than related diversification, according to Kuppuswamy et al. (2010), and
related diversified organisations minimise the provisioning costs necessary to retain staff by
lowering devices and systems. Alternative markets and easier adaptation.

3.3 Valuation effect recent financial crisis (2007-2009)

The literature is full of praise for the effect of the recent currency crisis on corporate costs for
various companies (affiliated and independent). In some literature (Angeles Lins & Servaes
(1999), the financial crisis has increased corporate costs for various companies (i.e., large for
diversification). Various findings in the literature (Rudolph & Schwetzler, 2014) suggest that the
harmful consequences of a credit-constrained environment continue to negatively impact various
companies' corporate costs, regardless of the feasible profits of the internal capital markets. New
lending to major borrowers declined by about 50% during the current currency crisis compared
to the prior quarter, indicating that credit was available at some point. It was revealed that the
inability to seek external capital limits firms' funding options in the setting of financial
restrictionss. These results indicate that at some point in a financially constrained situation,
having a larger developed internal capital market can greatly benefit the enterprise. As
previously said, diverse businesses frequently have more internal capital and are less reliant on
external financing (Rudolph & Schwetzler, 2014).
16

Therefore, in line with the theory discovered, mixed ventures have the advantage over
independent companies due to their high internal funding capacity, resulting in fewer
diversification proposals accepted under normal circumstances. It is also empirically seen in
Rudolph & Schwetzler's (2013) study. Following the currency crisis of enterprises operating in
countries with well-developed capital markets and strong investor rights, the study uncovered
evidence that the supply of diverse investment has decreased dramatically. Apart from the
internal capital markets available to diverse organisations, a well-developed stock exchange
might give more chances for extra external financing. Strong investor rights prevent self-
interesting business behaviour that can lead to conflicts within its internal capital markets and
make them inefficient (Rudolph & Schwetzler, 2014). Germany and the Netherlands (Lins &
Servaes, 1999), with well-developed capital markets and strong investor rights, need to reduce
their diversified investment in the financial crisis (2007-2009). There is even more empirical
help in this study. It found that the additional costs of various companies are growing rapidly as a
result of the crisis or have evolved to peak levels during the current financial crisis (2007-2009).
Man. She argues that mixed companies are more likely to be leveraged than their target, as her
rationale also includes internal capital markets and fewer coins with drift volatility. I am. As a
result, mixed companies will have access to larger, less complex capital from external markets,
except that they have better internal funding capacity than independent companies. In addition,
these internal funding opportunities have allowed different companies (especially credit-
restricted environments) to more effectively allocate equity available across segments and
struggles. There is an additional bonus of being able to fund valuable initiatives from other
departments.

H3A: The current financial crisis boosted the value of diversified firm

Dae la Rudolph and Schwetzler's findings are contradictory (2014). They claim that they are
lower than diversified firms' external debt, and that this reduces the potential benefits of
corporate diversification in the credit structure, partly through increasing discounts under normal
conditions. It predicts that expenses will rise as a result of sub-city and over-investment.
Therefore, the second (and total fourth) hypotheses on the evaluation effect of the latest financial
crisis are set and configured as follows:
H3B: The latest financial crisis (20072009) adversely affects the value of diversified companies.
As a result, there was essentially no evidence for hypothesis H3b. There is a distinction between
diverse organisations in relation to this difficulty, since theory and empirical evidence suggest
that a more developed internal capital market is solid. Because the test sample's composition is
unknown, it is possible that it contains benefits from companies that are diversified in a low
business, and there is no internal capital market to take advantage of these potential benefits.
Between the previous financial crises (2007-2009), a credit facility was established to lower the
diversification discount.
17

CHAPTER IV: METHODOLOGY

4.1 Choice of method

The pros and disadvantages of each strategy were considered while selecting one for this
investigation. The actual options model involves tough-to-collect data on option value
computations as well as some challenging calculations to comprehend. These debates on option
models, as well as the fact further that excess approach is simple to comprehend, uses publicly
available accounting data, and is largely employed in high-level publications in this field of
research, this method tests the hypothesis.

4.2. Excess value method

The first hypothesis is investigated via the so-called variable value approach, which was created
by Reeb (2002). They created a method for estimating diversification impacts on fixed values
that is frequently utilised. A division is defined as a business unit where separate accounting
costs are conducted by management. Comparison of these divided stand-alone values with the
value of the actual General Assembly to estimate the value of the company segment in all cases
this diversification, because of this diversification, Compare the ratio. Segments are operated as
stand-alone companies. This approach is also known as a value-added measure, and value-added
refers to the proportion of goodwill losses or income through business diversification. If this
additional value is positive, the firm will gain value via diversification; if it is negative, the
business will achieve value via diversification. Loss of goodwill as a result of company
diversification. The first hypothesis aims to test whether the diversification of companies has a
negative (company) valuation effect. Therefore, when viewed as an individual entity, it is
necessary to consider whether the value of the diversified entity is less than the total value of the
business segment.

4.2.1 Imputed value

Particular multiples are calculated using three separate accounting items and two market-based
metrics. As accounting items, total assets, total revenues, and EBIT, as well as selling price of
stocks / net capital (Return on Assets) and selling price of stocks / overall sales (Return on
Assets). The success of the multiples technique is dependant on management's transparency
strategy which is not always highly dependable when calculating imputed value. Because
managers may distribute revenue and costs, accounting tools can really be sensitive to activities.

Accounting items
It is usually acknowledged and validated to compute the surplus value based on sales after
reviewing the literature. Accounting regulations determine the surplus values depending on sales.
Therefore, the calculation of excessive value based on sales is probably a solid option for the
German survey in this study. The literature study can also consider that the excess value based
on assets is very frequently connected and available for consolidated data. Thus, the first
hypothesis has been tested in addition to market-based measures (D.TBIN Q and equity / total
sales market value) based on these three different accounting objects. To calculate the median of
18

sales multiples, industrial geometric industries, or median values, the capital city of the revenue
segment is implemented to receive sales of the cities of the segment industry. For selection, it
can be concluded that there is the freedom to explain the base value calculation. In addition,
there is some controversy in calculating the company's total capital. Therefore, the extra value
method itself is being considered in some articles.

4.2.2 Modifications
The value-added technique is used in this study, which is categorised into three accounting
ratios: total assets, total sales, and EBIT. Also, market value of stocks / total assets (Return on
Assets) and market value of stocks / total sales are two market-based indicators.
Market capitalisation is a simple way to calculate a business's market worth. Some adjustments
to the calculation of company performance and the accumulation of multiple copies should be
included in this work in terms of the validity of this approach and the influence of changes linked
to this technique on the final result.

Multiplier aggregation
Schwetzler (1995) published a study that supports the assumption that geometric mean
aggregation is a better alternative for assessing conglomerate rebates than median aggregation
(Miller, 2006). .. Only geometric mean aggregations of assigned values are correct and non-zero,
according to a study by Schwetzler (1995).

Modified excess value method

Therefore, Rudolph & Schwetzler's (2014) proposal is incorporated into the value-added method
by Schwetzler (1995). The debate that sales-based substitutions are considered more reliable also
flows into this method. Thus, in this work, all improvements are discussed to investigate whether
there is a significant difference in the results between the original method of Morellec &
Zhdanov (2005) and the amendment proposed by Rudolph & Schwetzler (1995). Incorporating
improvements/changes produces the following (modified) formula, as is known in mathematical
from the Morellec & Zhdanov (2005) formula above, but with different variables:
19

Therefore, the attribution calculated using the original Morellec & Zhdanov (2005) value method
is based on the industry median, while the attribution calculated using the modified value method
is the industry median. It is based on geometric mean, not.

Control variables
It is also necessary to account for extra firm-specific characteristics such as profitability and size
when using the proposed regression model. Such indicators will be sample-specific and
generated from available to the public segmentation information from multi-segment businesses.

Table 1: Control variables

Table 2: Methodology for hypotheses H1 + H2

4.3 Data
From 2005 to 2013, sampling of relevant listed firms in the Netherlands and Germany would be
gathered. The Orbis repository is used to collect treasury and balance sheet data, which is then
structured into balanced panels. The needed data from each firm for each year of the 2005-2013
timeframe must be provided for the most consistent data in computing surplus value. As
previously stated, a balanced panel requires trustworthy data every year. As a result, as discussed
in Chapter 4, the attributing value is derived based on these four parameters, excluding yearly
findings for enterprises that possess information on net assets revenues, EBIT, and market cap.
20

The scope of sales is excluded in the following phase if the sum of segment sales is less than 99
percent or less than 101 percent of total revenue. Beyond 95 percent, Morellec & Zhdanov
(2005) employ a total income threshold of less than 195 percent. Using the outlined screening
technique, a total of 450 businesses were discovered, with 366 of them being successful. Table
5.1 represents the number of exclusion organisations for each phase and discusses screening
processes.

Table 3: Dividing a company into diversified (conglomerate) and independent categories

Conglomerates (41.3 percent) and standalone enterprises (41.3 percent) make up the final
sample of 450 companies (58.7%). Compared to other research, the fraction of conglomerates is
unusually high, while the proportion of independent enterprises is rather low. Morellec &
Zhdanov (2005), for instance, employed a 12-year European population (1998, 2009) to discover
21% and 19.5 percent values in the German and Dutch samples, respectively. They also
discovered that the proportion of conglomerates in their total (global) sample fluctuated from
10.8 percent to 22.2 percent. The ratio of conglomerates has been shown to be twice as high in
several other American publications. For example, Neffke & Henning (2013) found in a sample
of the United States from 1986 to 1991 that about 32% of businesses were dispersed. Recent
research by Amman aet al. (2012) shows similar results. A US sample from 1985 to 2005 found
that 30% of companies were dispersed. Meanwhile, Neffke & Henning (2013) found that
between 1978 and 1996, the percentage of decentralised enterprises was much lower in the US
sample. Decentralised businesses made up 14% of the total. These mixed results indicate that the
information is influential in the proportion of conglomerates discovered. As reported by
Morellec & Zhdanov (2005 the relative amount of conglomerate changes significantly over time.
21

CHAPTER V: RESULT & DISCUSSIONS

The following are the outcomes of assessing a balanced panel of financial data in this chapter:

5.1 Descriptive Statistics

Table 4: Summary statistics

This table summarises the financial data for 366 German enterprises. The t-test is used to
determine statistical significance. The discrepancies between the average numbers of segments
of the German conglomerates are minimal, as shown in Table 5. In Germany, the average
number of segments is slightly higher (2.10). Morellec & Zhdanov (2005) also uses European
samples, as previously stated in this section. They discovered that in the European continent, the
22

average number of segments in each aggregation was 2.41, which is much smaller than the
outcome of this study. Palich, Cardinal, and Miller looked at the North American conglomerate
as well, and found that the average number of divisions is much fewer (2000)For these
conglomerates, the average number was 2.29.
Meanwhile, Morellec & Zhdanov (2005) discovered that the US conglomerate had an average of
2.89 parts. It also implies that dataset selection has an impact on the outcomes. Only the median
is explained and compared to existing research among the computed mean and median of the
balance sheet and market-based important metrics. Important related research, such as the Palich,
Cardinal, and Miller (2000) study, likewise only describes the median, limiting comparisons to
these medians.
The next indicator is capital expenditure, a percentage of total income and total assets. The key
conclusion is that Dutch firms (both conglomerates and small businesses) spend more money on
capital than German businesses. When total sales—the median Cap—is used, the gap is rather
significant. In Germany, the Ex./Total Sales Value is 0.027, while the Cap. Ex. The German
value is 0.026 based on the median of / Total Assets. Morellec & Zhdanov (2005) conducted a
comparative research on Cap. In the UK subsample, ex / total sales was 0.032, whereas for the
continent of Europe, it was 0.036. It's also worth noting that the outcomes of German single
proprietorship and conglomerate accounting rules are nearly identical. The average
Cap.Ex./Total Revenue figures for German conglomerates and independent firms are 0.020 and
0.036, respectively, whereas the average Cap.Ex./Total Revenue values for German
conglomerates and independent companies are 0.020 and 0.036, respectively. Ex./Total Revenue
accounting ratios are 0.019 and 0.035.
Morellec & Zhdanov (2005) discovered that the European continent's median CapEx/Total
Revenue measure was 4 percent for conglomerate and 4 percent for independent enterprises. It
also demonstrates that there isn't much of a distinction across conglomerates and independent
businesses. For US companies, Palich, Cardinal, & Miller (2000) is cap.ex. / We found similar
results for median total sales: 0.038 and 0.041 for decentralised and standalone companies,
respectively.
Looking at the results first, we conclude that the choice of leverage accounting standards
influences the results. The median value obtained using both conglomerate and independent
company liabilities / total sales is relatively lower than using liabilities / total assets as the
median leverage accounting standard. The median total debt/sales for the German is 0.368. For
conglomerates, the German conglomerates' median debt / total sales are 0.404. The median debt /
total income of independent companies in Germany is also not very different, at 0.353. A
previous study by Palich, Cardinal, & Miller (2000) showed that the median debt / total sales
were as low as 0.230 and 0.208 for continental European conglomerates and independent
companies, respectively. For subsamples of UK conglomerates and independent enterprises,
Palich, Cardinal, and Miller (2000) reported an even lower value of 0.184. In a prior research by
Morellec & Zhdanov (2005) Survey, the claim that dataset selection might alter outcomes
appears to be correct. They discovered that the leverage ratios (debt / total sales) for US
conglomerates and independent companies were 0.531 and 0.436, correspondingly.
23

The market value of shares divided by total sales is a second market-based metric used in this
argument. In terms of this criterion, German has a median value of 0.549. In consideration of
stand-alone performance, German has a median score of 0.793.
The median total debt / total assets is 0.448 when considering debt / total assets as a measure of
leverage. When comparing conglomerates and independent businesses, it becomes clear that
conglomerates have more leverage than independent businesses. As previously stated,
when utilising liabilities / total assets as a measure of leverage, the results are significantly
greater. The median debt / total asset value of German and Dutch conglomerates is 0.556 and
0.468, respectively, which is also the difference in value compared to the value computed by the
total sale of debt/leverage. The second market-based indicator employed in this activity is stock
market value / total sales. Based on this key figure, the median German conglomerate is 0.549.
For standalone, the median standalone for Germany is 0.793. The direct values associated with
this market-based indicator were not found or calculated in the literature received and were not
compared to other literature related to this market-based indicator.

5.2 Excess values

Appendix C contains the estimated excess values based on Palich, Cardinal, and Miller (2000).
The real worth of the firm seems to be more than double the the inferred value which is less than
a fourth of the imputed value, leading in 126 German conglomerates in the business's year.
Observations are not included. In Appendix C, value-added is calculated using corporate value
rather than goodwill. The excesses for distinct unrelated and linked conglomerates are also
categorised in the table in Appendix C, correspondingly, when it comes to the estimated excesses
for conglomerates. The German sample has 114 related and varied yearly observations (i.e., 1739
irrelevant and diverse annual observations), whereas the Dutch sample has 54 related and diverse
annual observations (i.e., 1739 irrelevant and diverse annual observations).

5.2.1 Regressions
The coefficient estimations of the regressions with regard to mean-based additional differs
depending on corporation fee as such a based variable and related segments as an unbiased
variable are shown in table 5. Because of comparisons with other research, these regressions
seem to be the most critical (Krishnaswami & Subramaniam,1999). I also ran the same
regressions for correctly median-based additional values based on company charge and
mean/median-based entirely extra values based on company fee. These effects may also be
mentioned, and for greater clarification, the effects may be determined.

The regressions in panel A (Germany) provide additional evidence in support the hypothesis:
related diversification does have a significant influence on extra values. Except for additional
values based entirely on EBIT, all rounds of study are given statistically significant coefficients.
The coefficients with median-based additional values based on corporation fee, as such best one,
indicate a weak association (-0.005) with said linked segmentation variable; nonetheless, this
finding is no longer statistically significant. For mean-based additional values based on
corporation fee, the greatest statistically significant coefficient is computed.
24

Table 5: Estimates of coefficients based on regression of mean-based data

5.3 During the financial crisis, the need of corporate diversity was highlighted
We will look at the gap among conglomerates (diversified investments of both connected and
non-related enterprises) and the added value of independent companies between the current
financial crisis and the non-crisis period. During both eras, the distinctions between
conglomerates and stand-alone enterprises were investigated, with the current financial crisis and
the entire sample of conglomerates and stand-alone businesses (crisis and non-crisis) during the
non-crisis period. The differences are compared and contrasted. The fact that the majorities of
the excesses discovered thus far are not significant and hence should not be employed is a flaw
in the procedure.

Increased excess values conglomerates during crisis

In Germany, conglomerates enjoyed a 40 percent rise in added value during the financial crisis
comparison to non settings. This holds true for added value based on total assets and sales larger
amounts. It's also 35% and 25% greater than the values found regarding the total value and
financial value / total sales during the previous financial crisis (2007), correspondingly, in both
conglomerate and independent firm populations; additionally notice that there are overvalues. In
the 1999-2011 US-based sample, diversification haircuts improved (ie, rose) during the current
financial crisis, 8.8 for both internationally and industrially diversified companies, according to
Palich, Cardinal, and Miller (2000). %, compared to 5.8% for organisations that are simply
internationally diversified. German conglomerates had a 50 percent larger surplus value during
the current financial crisis (2007-2009) than in the non-financial crisis period. The determined
diversified premiums for the non-financial crisis and the most recent financial crisis (2007-2009)
are 0.076 and 0.116, respectively.
25

Reduced excessive conglomerates during crisis

Concerning Germany, it was found that exclusive values based on the company's value support
hypothesis H3B. The subordinate extra cost values derived using total sales and EBIT-based
multiples have a diverse bonus among the state of the current financial crisis (2007-2009) and
other situations. However during current financial crisis, though, such premiums fell by around
55% and 70%, respectively, due to high values relative to total sales as well as EBIT multipliers
accumulation. There are also significant disparities among these EBIT multiplier aggregation and
community-based additional values based on sales. The value of the recent financial crisis (about
20%) of the upper surplus (approximately 20%) in the recent financial crisis is included in the
total sales multiplier aggregation. These results indicate the possibility of calculating excess
value (i.e., a multiplier aggregation accounting element and a selection of fixed rating).

Table 6

Table 7: Conglomerate and standalone excessive values throughout the financial crisis (2007-
2009) and non-crisis periods.

CHAPTER VI: CONCLUSION

Overall, you can see that decentralised companies are trading at a discounted price compared to
comparable stand-alone companies. Comparing the value-added (and average and median) of
both the conglomerate and the individual companies based on the value of the company and the
company, it can be concluded that the value-added based on the company value is about 15%
26

higher overall. Added value based on company values. It applies to three balance sheets and two
market-based indicators. It is in partial agreement with the results of Kumar (2013), who claim
that goodwill-based overestimation is distorted down, by about 23% (due to the low rate of
detection). Looking at the difference in surplus value (and goodwill and corporate value) based
on the mean and median multiplex, we see that the surplus value based on the mean multiplex is
5% lower than the surplus-value. Again, this is partly in line with Kumar (2013), who argues that
the excesses based on the median multipliers differ from those based on the median multipliers
(because of the lower percentages detected). I am. Overall, after considering the value-added
determined for both the conglomerate and the individual companies, both individual companies
in Germany.
To answer the question in the first survey, we will examine in detail the difference in added
value between affiliated and non-affiliated diversified companies. From this study, we can
conclude that irrelevant diversification affects corporate value of German. Unfortunately, the
impact of irrelevant diversification is variable, and it is uncertain whether it will have a good or
negative influence on German company value. The findings imply that this effect
is dependant on the approach utilised, as well as the bookkeeping or market-based measurement
used. The German sample, on the other hand, shows a positive relationship among related
diversification and business value. A notable and significant result of this more positive
relationship is the goodwill-based median excess for multiple aggregates of total sales: the last of
2008-2009. During the financial crisis, companies were found for each of the unrelated and
related diversifications that resulted in values of 0.101 and 0.073.
During the crisis, various independent conglomerates held higher added value than related
conglomerates. The regression performed provides empirical evidence that the number of
adjacent segments is positively related to overrun. In the German sample, we found additional
signs suggesting that the corresponding variance positively affected surplus value (excluding
surplus value based on EBIT multiplier aggregation). The Dutch sample, on the other hand, did
not have this extra evidence. Some findings from the Dutch sample imply a positive relationship
among value and linked segments, however these findings were not statistically significant.
Multiplier aggregation is mainly based on total revenue and provides the greatest constant and
good results accordingly. In addition, the additional value mainly throughout the overall revenue
is mainly due to alternative accounting measures, i.e., total assets, EBITs) and much lower or
high quality for additional values. It is also observed that it has been observed. As mentioned
earlier, Kumar (2013) is more accurate in regards to additional values based on the overall
revenue, and thus without providing greater reliable diversification courses/premiums. I argue
that it is not. Despite the clear evidence with praise of this paper, the reliability of these papers
will certainly ensure that the income statement is surely I realised that provide the results of the
monofac display that absolutely. By clarifying additional values between financial crises, this
epoch may be deducted that they can have high quality or adverse effects at the expense of the
classified enterprises. These results are properly considered for German patterns. High-quality
effects are mainly based on total income, and the largest statistical broad variation is mainly the
largest statistical wide variation based on total revenue. In 2009, we mainly focused on the body
27

expenses compared to the state of the state based on lateral aspects and additional values.
Overall, the biggest critical end drawn from this work research is no longer clean, is no longer
clean, it is no longer clean, but it is no longer clean, and the price of diversified prices is free. For
each provision of speculative contradiction, it is discovered that it is used early or later to select
the method. In addition, German patterns can be concluded that they have more reliable and
much less contradictory results and may be affected by data record selection.
28

APPENDICES
A: sampling:

B: Sample breakdown
29

C1: Excess Values

C2:
30

D: Regressions
31

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