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Are real options a missing piece in the diversification-value puzzle?

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  • de Andrés, Pablo
  • de la Fuente, Gabriel
  • Velasco, Pilar

Abstract

This paper examines the impact of corporate diversification on a firm's market value in terms of changes in its mix of value sources between growth options and assets-in-place. We argue that the traditionally assumed replicability of corporate diversification benefits by individual investors might not be as feasible when diversification implies acquiring new growth options as when it only involves assets-in-place investments. We further explain why a different effect of diversification on a firm's mix of value sources can occur, therefore leading to a mediating role of growth options between diversification and market value. Using a panel sample of U.S. firms from 1998 to 2010, we find that a firm's growth options portfolio helps explain the effect of diversification strategy on its market value.

Suggested Citation

  • de Andrés, Pablo & de la Fuente, Gabriel & Velasco, Pilar, 2016. "Are real options a missing piece in the diversification-value puzzle?," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 261-271.
    • Handle: RePEc:eee:finana:v:48:y:2016:i:c:p:261-271
    DOI: 10.1016/j.irfa.2016.10.007
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    Cited by:

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    2. Fuente, Gabriel de la & Velasco, Pilar, 2020. "Capital structure and corporate diversification: Is debt a panacea for the diversification discount?," Journal of Banking & Finance, Elsevier, vol. 111(C).
    3. Lin, Boqiang & Wang, Siquan, 2023. "The performance of specialized and oriented diversified firms: A comparative analysis from the targeted expansion of renewable energy business of listed companies," International Review of Financial Analysis, Elsevier, vol. 89(C).

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    More about this item

    Keywords

    Corporate diversification; Firm value; Growth opportunities; GMM; Mediating effect;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

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