Why Agency Costs Explain Diversification Discounts

Henrik Cronqvist, Peter Högfeldt () and Mattias Nilsson ()
Additional contact information
Peter Högfeldt: Department of Finance, Stockholm School of Economics, Postal: Box 6501, SE-113 83 Stockholm, Sweden
Mattias Nilsson: Department of Finance, Stockholm School of Economics, Postal: Box 6501, SE-113 83 Stockholm, Sweden

No 294, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We study diversification within the real estate industry because of its relative transparency: portfolio management of assets with well-defined market prices. Diversification is over property types and geographical regions. The major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue non-focusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, are predominantly privately controlled and extensively using dual-class shares. The ex ante diversification discount is, therefore, a measure of agency costs.

Keywords: Diversification; Diversifying strategy; Ex ante discounts; Rent dissipation; Agency costs; Private control (search for similar items in EconPapers)
JEL-codes: G30 G31 G32 (search for similar items in EconPapers)
Pages: 52 pages
Date: 1999-01-21, Revised 2000-09-27
References: Add references at CitEc
Citations:

Published in Real Estate Economics, 2001, pages 85-126.

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Why Agency Costs Explain Diversification Discounts (2001)
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:hhs:hastef:0294

Access Statistics for this paper

More papers in SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Helena Lundin ().