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Costly refocusing, the diversification discount, and the pervasiveness of diversified firms

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  • Anjos, Fernando

Abstract

I develop a stationary real options model with corporate restructuring costs that endogenously generates a diversification discount. This result requires that restructuring costs associated with spin-offs (refocusing moves) be significantly larger than those associated with acquisitions (diversifying moves). The discount is due to the fact that diversified firms performing poorly will still delay refocusing, given the high cost of implementing this strategy. The model delivers the counter-intuitive implication that the higher the (average) discount observed in the economy, the higher the (average) proportion of diversified firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 16 (2010)
Issue (Month): 3 (June)
Pages: 276-287

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Handle: RePEc:eee:corfin:v:16:y:2010:i:3:p:276-287

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Diversification Real options Mergers;

References

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Cited by:
  1. Whalley, Jason & Curwen, Peter, 2011. "Third time lucky? An exploration of Hutchison Whampoa's involvement in the mobile telecommunications industry," 22nd European Regional ITS Conference, Budapest 2011: Innovative ICT Applications - Emerging Regulatory, Economic and Policy Issues 52188, International Telecommunications Society (ITS).

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