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Tobin's Q, Corporate Diversification and Firm Performance

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Author Info
Larry H.P. Lang
Rene M. Stulz

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Abstract

In this paper, we show that Tobin's q and firm diversification are negatively related. This negative relation holds for different diversification measures and when we control for other known determinants of q. We show further that diversified firms have lower q's than equivalent portfolios of specialized firms. This negative relation holds throughout the 1980s in our sample. Finally, it holds for firms that have kept their number of segments constant over a number of years as well as for firms that have not. In our sample, firms that increase their number of segments have lower q's than firms that keep their number of segment constant. Our evidence is consistent with the view that firms seek growth through diversification when they have exhausted internal growth opportunities. We fail to find evidence supportive of the view that diversification provides firms with a valuable intangible asset

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4376.

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Date of creation: Jun 1993
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Publication status: published as Journal of Political Economy, December 1994, 1248-1280
Handle: RePEc:nbr:nberwo:4376

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  1. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April. [Downloadable!] (restricted)
  2. Morck, R. & Yeung, B., 1991. "Why Investors Value Multinationality," Working Papers 282, Research Seminar in International Economics, University of Michigan.
  3. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  4. Weston, J Fred & Smith, Keith V & Shrieves, Ronald E, 1972. "Conglomerate Performance Using the Capital Asset Pricing Model," The Review of Economics and Statistics, MIT Press, vol. 54(4), pages 357-63, November. [Downloadable!] (restricted)
  5. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March. [Downloadable!] (restricted)
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  6. repec:fth:michin:282 is not listed on IDEAS
  7. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Schwert, G. William, 1983. "Size and stock returns, and other empirical regularities," Journal of Financial Economics, Elsevier, vol. 12(1), pages 3-12, June. [Downloadable!] (restricted)
  9. Lichtenberg, Frank R., 1992. "Industrial de-diversification and its consequences for productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 427-438, August. [Downloadable!] (restricted)
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  10. Donaldson, Gordon, 1990. "Voluntary restructuring : The case of General Mills," Journal of Financial Economics, Elsevier, vol. 27(1), pages 117-141, September. [Downloadable!] (restricted)
  11. Sam Peltzman, 1977. "The Gains and Losses From Industrial Concentration," NBER Working Papers 0163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October. [Downloadable!] (restricted)
  13. Kaplan, Steven N & Weisbach, Michael S, 1992. " The Success of Acquisitions: Evidence from Divestitures," Journal of Finance, American Finance Association, vol. 47(1), pages 107-38, March. [Downloadable!] (restricted)
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  14. Lichtenberg, Frank R, 1991. "The Managerial Response to Regulation of Financial Reporting for Segments of a Business Enterprise," Journal of Regulatory Economics, Springer, vol. 3(3), pages 241-49, September.
  15. Morck, Randall & Yeung, Bernard, 1991. "Why Investors Value Multinationality," Journal of Business, University of Chicago Press, vol. 64(2), pages 165-87, April. [Downloadable!] (restricted)
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