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Strategic Cost of Diversification

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  • Evgeny Lyandres
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    Abstract

    This article proposes a new explanation for the large cross-sectional variation in the excess values of diversified firms. The model applies the idea of shareholders' limited liability affecting firms' output market strategies to the analysis of financial and operating choices of conglomerates. The inability of conglomerates to commit to unconstrained optimal operating strategies, following from the lack of flexibility in choosing their divisions' capital structures, reduces their value. Thus, the model highlights a new type of inefficiency of the conglomerate organizational structure, which is suboptimal financing. The predictions of the model are generally supported by the data. , Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhm047
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 20 (2007)
    Issue (Month): 6 (November)
    Pages: 1901-1940

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    Handle: RePEc:oup:rfinst:v:20:y:2007:i:6:p:1901-1940

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    Cited by:
    1. Nippa, Michael, 2011. "Zur Notwendigkeit des Corporate Portfolio Management: Eine W├╝rdigung der wissenschaftlichen Forschung der letzten vier Jahrzehnte," Freiberg Working Papers 2011,02, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.

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