The shareholder value and diversification puzzle
AbstractDiversified 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.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/853.
Length: 46 pages
Date of creation: 01 Apr 2010
Date of revision:
diversification; performance persistence; shareholder value; conditional variance;
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