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The shareholder value and diversification puzzle

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  • Marinelli, Federico

    (IESE Business School)

Abstract

Diversified firms are supposed to be valued less than the sum of their parts because of the diversification discount, but subsequent research has found that the relationship between diversification and shareholder value is not causal. We analyze the relationship between diversification and shareholder value taking into consideration the persistence of profit over the long term. We offer new insights and a complementary view for investors: single segment firms do not generate more shareholder value than diversified firms, and in some situations the opposite is true. Moreover, we find that the relationship between diversification and shareholder value is not causal, but clearly depends on the capacity of the firm to generate a long-term persistent outstanding performance. Finally, we demonstrate that in comparison to diversified firms, single segment firms might be considered "growth stocks" whose return is explained by higher volatility and a higher size premium.

Suggested Citation

  • Marinelli, Federico, 2010. "The shareholder value and diversification puzzle," IESE Research Papers D/853, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0853
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    Cited by:

    1. Elif AKBEN SELCUK, 2014. "Corporate Diversification, Group Affiliation and Firm Value: Evidence From Turkey," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 8(2), pages 151-174.

    More about this item

    Keywords

    diversification; performance persistence; shareholder value; conditional variance;
    All these keywords.

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