Are real options a missing piece in the diversification-value puzzle?

Pablo de Andrés, Gabriel de la Fuente and Pilar Velasco

International Review of Financial Analysis, 2016, vol. 48, issue C, 261-271

Abstract: This paper examines the impact of corporate diversification on a firm's market value in terms of changes in its mix of value sources between growth options and assets-in-place. We argue that the traditionally assumed replicability of corporate diversification benefits by individual investors might not be as feasible when diversification implies acquiring new growth options as when it only involves assets-in-place investments. We further explain why a different effect of diversification on a firm's mix of value sources can occur, therefore leading to a mediating role of growth options between diversification and market value. Using a panel sample of U.S. firms from 1998 to 2010, we find that a firm's growth options portfolio helps explain the effect of diversification strategy on its market value.

Keywords: Corporate diversification; Firm value; Growth opportunities; GMM; Mediating effect (search for similar items in EconPapers)
JEL-codes: C34 D22 G32 L25 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:48:y:2016:i:c:p:261-271

DOI: 10.1016/j.irfa.2016.10.007

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