The Performance of Optimally Diversified Firms: Reconciling Theory and Evidence

João Gomes () and Dmitry Livdan

No 3546, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We construct an equilibrium model of firm diversification to show that the main empirical findings about firm diversification and performance are consistent with the maximization of shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of synergies. By explicitly linking the diversification strategies of the firm to differences in size and productivity, our model provides a natural laboratory to quantitatively investigate several aspects of the relationship between diversification and performance. Specifically, we show that our model is able to rationalize both the evidence on the diversification discount (Lang and Stulz (1994)) and the observed relation between diversification and firm productivity (Schoar (2002)).

Keywords: Firm diversification; Tobin's q; Diversification discount; Total factor productivity (search for similar items in EconPapers)
JEL-codes: D21 G32 G34 (search for similar items in EconPapers)
Date: 2002-09
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP3546 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3546

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3546

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().