Does Diversification Cause the "Diversification Discount"?

Belén Villalonga

Financial Management, 2004, vol. 33, issue 2

Abstract: Using recent econometric developments about causal inference, I examine whether diversification destroys value. I estimate the value effect of diversification by matching diversifying and single-segment firms on their propensity score––the predicted values from a probit model of the propensity to diversify. I also use Heckman’s (1979) two-stage estimator for comparison purposes. I find that on average, diversification does not destroy value. This finding is robust to the choice of estimator, sample, measures of excess value, and specification.

Date: 2004
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