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Is there an optimally diversified conglomerate? Gleaning answers from capital markets

Ali Nejadmalayeri (), Subramanian Rama Iyer () and Manohar Singh ()
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Subramanian Rama Iyer: The University of New Mexico
Manohar Singh: Pennsylvania State University-Abington

Review of Quantitative Finance and Accounting, 2017, vol. 49, issue 1, 117-158

Abstract: Abstract Motivated by recent productivity-based theories of diversification, we argue that only conglomerates with an optimal degree of diversification can utilize their comparative advantages across various industries and achieve economies of scope by eliminating redundancies. Evidence from both corporate bond and equity markets suggests that optimally diversified conglomerates consist of either (1) approximately five equally weighted divisions, or (2) one large core business segment that roughly accounts for 75 % sales. Moreover, the relative size of divisions has a critical impact on how diversification affects credit spreads and excess values. Nonparity among divisions correlates with greater costs that increase with the number of divisions.

Keywords: Conglomerates; Optimal diversification; Credit spreads; Equity discount (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:kap:rqfnac:v:49:y:2017:i:1:d:10.1007_s11156-016-0585-x