The Apparent Diversification Discount

Michela Altieri and Giovanna Nicodano

No 465, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Our model highlights the impact of bankruptcy on (true and apparent) firm value. We show that the pricing of diversified firms suffers from a survivorship bias, due to their lower mortality relative to focused ones. This difference in mortality is able to turn a true diversification premium, deriving from saved bankruptcy costs, into an apparent diversification discount. Such apparent discount is larger the larger is the true premium due to coinsurance across diversified units. We show how this insight contributes to explain value paradoxes in diversified companies such as multi-unit groups, multi-segment conglomerates, and parent companies.

Keywords: bankruptcy costs; coinsurance; contagion; limited liability; diversification discount; survivorship bias; parent company discount; cost of debt (search for similar items in EconPapers)
JEL-codes: D23 G32 K19 (search for similar items in EconPapers)
Pages: pages 46
Date: 2016
New Economics Papers: this item is included in nep-cfn, nep-dcm and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:465

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