Explaining the diversification discount

Jose Campa and Simi Kedia
Additional contact information
Simi Kedia: Harvard University

No D/424, IESE Research Papers from IESE Business School

Abstract: Diversified firms trade at a discount relative to similar single-segment firms. We argue in this paper that this observed discount is not per se evidence that diversification destroys value. Firms choose to diversify. Firm characteristics, which make firms diversify might also cause them to be discounted. Not taking into account these firm characteristics might wrongly attribute the observed discount to diversification. Data from the Compustat Industry Segment File from 1978 to 1996 are used to select a sample of single segment and diversifying firms. We use three alternative econometric techniques to control for the endogeneity of the diversification decision. All three methods suggest the presence of self-selection in the decision to diversify and a negative correlation between firm's choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium, when we control for the endogeneity of the diversification decision. We do a similar analysis in a sample of refocusing firms. Again, some evidence of self-selection by firms exists and we now find a positive correlation between firm's choice to refocus and firm value. These results consistently suggest the importance of taking the endogeneity of the diversification status into account, in analyzing its effects on firm value.

Keywords: Diversification discount (search for similar items in EconPapers)
JEL-codes: F20 F29 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2000-10-23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.iese.edu/research/pdfs/DI-0424-E.pdf (application/pdf)

Related works:
Journal Article: Explaining the Diversification Discount (2002)
Working Paper: Explaining the Diversification Discount (1999)
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:ebg:iesewp:d-0424

Access Statistics for this paper

More papers in IESE Research Papers from IESE Business School IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN. Contact information at EDIRC.
Bibliographic data for series maintained by Noelia Romero ().