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Does it really matter how a firm diversifies? Assets-in-place diversification versus growth options diversification

Pablo de Andrés, Gabriel de la Fuente and Pilar Velasco

Journal of Corporate Finance, 2017, vol. 43, issue C, 316-339

Abstract: This study analyses whether the effect of corporate diversification on a firm's market value depends on how this strategy is implemented. According to the real options approach, two opposite diversification strategies may be implemented: one based on fully exercising available options (assets-in-place diversification) and the other aimed at seeding new opportunities for future growth in multiple businesses (growth options diversification). We propose an index to measure these two diversification patterns and we explore their impact on firm market value for a sample of U.S. firms during 1998–2014. We find that as a firm's diversification strategy shifts towards a growth options pattern, it becomes a more value-enhancing strategy.

Keywords: Corporate diversification; Growth opportunities; Firm value; Investment strategy; Self-selection (search for similar items in EconPapers)
JEL-codes: L25 G32 D22 C34 (search for similar items in EconPapers)
Date: 2017
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