Does Diversification Cause the “Diversification Discount”?

Belen Villalonga

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: I examine whether the discount of diversified firms can actually be attributed to diversification itself, using recent econometric developments about causal inference. The value effect of diversification is unbiasedly estimated by matching diversified and specialized firms on the propensity score––the predicted values from a probit model of the propensity to diversify. I apply this method on a sample of diversified firms that trade at a significant mean and median discount relative to specialized firms of similar size and industry. I find that, when a more comparable benchmark based on propensity scores is used, the diversification discount as such disappears or even turns into a premium.

Date: 2000-07-01
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