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Value, Survival, and the Evolution of Firm Organizational Structure

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  • Richard Borghesi
  • Joel Houston
  • Andy Naranjo

Abstract

We examine corporate product diversification as a dynamic process. Consistent with prior research, we find that the average diversification discount is about 8% when using the standard value‐multiple approach. However, we find that a significant portion of the diversification discount arises from benchmark comparisons of value ratios of mature firms with those of very young firms that are more likely to have high value multiples. The magnitude of the diversification discount falls by 15% to 30% when we control for firm age. We also show that diversification reduces the mortality rate of firms, and we provide evidence that mature firms pursue diversification strategies partly as a means to exit stagnant business segments for industries that are more highly valued.

Suggested Citation

  • Richard Borghesi & Joel Houston & Andy Naranjo, 2007. "Value, Survival, and the Evolution of Firm Organizational Structure," Financial Management, Financial Management Association International, vol. 36(3), pages 5-31, September.
    • Handle: RePEc:bla:finmgt:v:36:y:2007:i:3:p:5-31
    DOI: 10.1111/j.1755-053X.2007.tb00078.x
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    Cited by:

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    2. Velasco, Pilar, 2022. "Is bank diversification a linking channel between regulatory capital and bank value?," The British Accounting Review, Elsevier, vol. 54(4).
    3. Hund, John & Monk, Donald & Tice, Sheri, 2010. "Uncertainty about average profitability and the diversification discount," Journal of Financial Economics, Elsevier, vol. 96(3), pages 463-484, June.
    4. Xiao, Zhijie & Xu, Lan, 2019. "What do mean impacts miss? Distributional effects of corporate diversification," Journal of Econometrics, Elsevier, vol. 213(1), pages 92-120.
    5. Lee, Bong Soo & Li, Ming-Yuan Leon, 2012. "Diversification and risk-adjusted performance: A quantile regression approach," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2157-2173.
    6. Bidisha Chakrabarty & Ananth Seetharaman & Zane Swanson & Xu (Frank) Wang, 2018. "Management Risk Incentives and the Readability of Corporate Disclosures," Financial Management, Financial Management Association International, vol. 47(3), pages 583-616, September.

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