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The Diversification Discount: Cash Flows vs. Returns

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  • Owen Lamont
  • Christopher Polk

Abstract

Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flow and returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7396.

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Date of creation: Oct 1999
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Publication status: published as Lamont, Owen A. and Christopher Polk. "The Diversification Discount: Cash Flows Versus Returns," Journal of Finance, 2001, v56(5,Oct), 1693-1721.
Handle: RePEc:nbr:nberwo:7396

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