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The Diversification Discount Puzzle: Empirical Evidence for a Transactions Cost Resolution

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  • Raj Aggarwal
  • Shelly Zhao

Abstract

Prior literature on the diversification discount and the relative efficiency of internal versus external capital markets provides decidedly mixed results. We argue that transactions cost economics are useful in understanding this puzzle. According to transactions cost economics, diversified firms should outperform single-segment firms in industries with higher external transaction costs (e.g., emergent industries). Similarly, single-segment firms should outperform diversified firms in industries with low external transactions costs and high agency and other internal costs (e.g., some mature industries). This paper provides empirical evidence supporting these contentions.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp222.

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Date of creation: 06 Jun 2007
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Handle: RePEc:iis:dispap:iiisdp222

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Keywords: Diversification; transaction cost economics; internal markets;

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Cited by:
  1. Mehri, Meryem, 2014. "The Differential Effects of Law, Culture and Political Risk on Fees, Performance and Risk-Taking Behavior of Islamic and Conventional Funds," Economics Papers from University Paris Dauphine 123456789/13099, Paris Dauphine University.

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