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Diversification, Ricardian Rents, and Tobin's q

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  • Cynthia A. Montgomery
  • Birger Wernerfelt

Abstract

According to prevailing theory, firms diversify in response to excess capacity of factors that are subject to market failure. By probing into the heterogeneity of these factors, we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents. An empirical test, with Tobin's q as the measure of rents, is consistent with this theory.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 4 (Winter)
Pages: 623-632

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Handle: RePEc:rje:randje:v:19:y:1988:i:winter:p:623-632

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Cited by:
  1. Qian Cher Li & Andrea Mina & Bruce S. Tether & Karl Wennberg, 2011. "Diversification and Human Capital as Antecedents of Internationalization amongst Professional Service Firms: A Study of UK Based Engineering Consultants," DRUID Working Papers 11-15, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  2. Kevin Amess & Mike Wright, 2012. "Leveraged buyouts, private equity and jobs," Small Business Economics, Springer, vol. 38(4), pages 419-430, May.
  3. Mitchell Berlin, 1999. "Jack of all trades? Product diversification in nonfinancial firms," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 15-29.
  4. Schwiebacher, Franz, 2013. "Does fragmented or heterogeneous IP ownership stifle investments in innovation?," ZEW Discussion Papers 13-096, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Tarziján, Jorge, 2013. "The emergence of world-class companies in Chile: Analysis of cases and a framework to assess integration decisions," Journal of Business Research, Elsevier, vol. 66(10), pages 1728-1735.
  6. Barnett, William P. & Pontikes, Elizabeth G., 2006. "The Red Queen, Success Bias, and Organizational Inertia," Research Papers 1936, Stanford University, Graduate School of Business.
  7. Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 805-851, August.
  8. Harry P. Bowen & Margarethe Wiersema, 2009. "International and Product Diversification: Their Interrelationship and Impact on Firm Performance," Discussion Paper Series 2009-04, McColl School of Business, Queens University of Charlotte.
  9. van Oijen, A.A.C.J. & Hendrikse, G.W.J., 2002. "Governance Structure, Product Diversification, and Performance," ERIM Report Series Research in Management ERS-2002-51-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  10. Weiwen Li & Ai He & Hailin Lan & Daphne Yiu, 2012. "Political connections and corporate diversification in emerging economies: Evidence from China," Asia Pacific Journal of Management, Springer, vol. 29(3), pages 799-818, September.
  11. Nicolai J. Foss, 1997. "Equilibrium vs Evolution in the Resource-Based Perspective The Conflicting Legacies of Demsetz and Penrose," DRUID Working Papers 97-10, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  12. Mol, Joeri M. & Wijnberg, Nachoem M., 2002. "Value chain envy: explaining new entry and vertical integration in popular music," Research Report 02B62, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  13. Thorsten Grohsjean & Tobias Kretschmer & Nils Stieglitz, 2011. "Performance Feedback, Firm Resources, and Strategic Change," DRUID Working Papers 11-02, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  14. Nicolai J. Foss, 2002. "The Strategy and Transaction Cost Nexus Past Debates, Central Questions, and Future Research Possibilities," DRUID Working Papers 02-04, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.

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