The Cost of Diversity: The Diversification Discount and Inefficient Investment

Raghuram Rajan, Henri Servaes and Luigi Zingales

No 6368, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.

JEL-codes: G31 L22 (search for similar items in EconPapers)
Date: 1998-01
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Published as Journal of Finance, Vol. 55, no. 1 (2000): 35-80.

Downloads: (external link)
http://www.nber.org/papers/w6368.pdf (application/pdf)

Related works:
Journal Article: The Cost of Diversity: The Diversification Discount and Inefficient Investment (2000)
Working Paper: The Cost of Diversity: The Diversification Discount and Inefficient Investment (1998)
Working Paper: The Cost of Diversity: The Diversification Discount and Inefficient Investment
Working Paper: The Cost of Diversity: The Diversification Discount and Inefficient Investment
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:nbr:nberwo:6368

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6368

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().