Short-Sales Constraints and the Diversification Puzzle

Adam V. Reed (), Pedro Saffi and Edward D. Van Wesep ()
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Adam V. Reed: Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599
Edward D. Van Wesep: Leeds School of Business, University of Colorado Boulder, Boulder, Colorado 80309

Management Science, 2021, vol. 67, issue 2, 1159-1182

Abstract: Disagreement about stock valuation, combined with short-sales constraints, can increase asset prices. We build a model showing that, so long as investor beliefs are not perfectly correlated, investors disagree less about the value of a conglomerate than about each of its individual divisions. This generates a conglomerate discount with disagreement and short-sales constraints being complementary in explaining its cross-sectional variation. We test these predictions empirically and find substantial support: conglomerates have lower differences of opinion and lower short-sales constraints than pure-play firms. Furthermore, greater differences of opinion and tighter short-sales constraints are significant predictors of valuation differences between conglomerates and pure plays. This paper was accepted by Karl Diether, finance.

Keywords: diversification discount; short-sales constraints; differences of beliefs; equity lending; conglomerates (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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