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Diversification discount and investor sentiment

Joel T. Harper, Subramanian Rama Iyer and Ali Nejadmalayeri ()

The North American Journal of Economics and Finance, 2017, vol. 42, issue C, 218-236

Abstract: While previous research has linked the diversification discount to suboptimal managerial decisions, recent empirical work and methods have shown these relationships are not as strong. A rational learning framework indicates the diversification discount is related to economic activity. Building on this framework, we test and find support for the hypothesis that investor sentiment explains the diversification discount. Investor sentiment favors riskier firms when sentiment is high, thereby increasing returns and relative valuations. As a result, diversified firms imputed value based on these multiples leads to a larger diversification discount and reverses when sentiment falls.

Keywords: Diversification discount; Sentiment; Rational learning (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecofin:v:42:y:2017:i:c:p:218-236