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The Diversification Discount: Cash Flows vs. Returns

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Author Info
Owen Lamont
Christopher Polk

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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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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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Handle: RePEc:nbr:nberwo:7396

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-76, July. [Downloadable!] (restricted)
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  2. Dennis R. Capozza & Paul J. Seguin, 1999. "Focus, Transparency and Value: The REIT Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(4), pages 587-619. [Downloadable!] (restricted)
  3. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March. [Downloadable!] (restricted)
  4. Berger, Philip G & Ofek, Eli, 1996. " Bustup Takeovers of Value-Destroying Diversified Firms," Journal of Finance, American Finance Association, vol. 51(4), pages 1175-1200, September. [Downloadable!] (restricted)
  5. John Y. Campbell, 1991. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
  7. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March. [Downloadable!] (restricted)
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  8. José Manuel Campa & Simi Kedia, 1999. "Explaining the Diversification Discount," Working Papers 99-06, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
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  9. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Ball, Ray, 1978. "Anomalies in relationships between securities' yields and yield-surrogates," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 103-126. [Downloadable!] (restricted)
  11. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January. [Downloadable!] (restricted)
  12. Pontiff, Jeffrey, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1135-51, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Acharya, Viral V & Bisin, Alberto, 2002. "Entrepreneurial Incentives in Stock Market Economies," CEPR Discussion Papers 3474, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Laeven, Luc & Levine, Ross, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Rosenberg, Matts, 2003. "Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design," Working Papers 496, Hanken School of Economics. [Downloadable!]
  4. David Hyland, 2008. "The long-run performance of diversifying firms," Journal of Economics and Finance, Springer, vol. 32(3), pages 294-310, July. [Downloadable!] (restricted)
  5. Lionel Nesta, 2005. "Knowledge and Productivity in the World's Largest Manufacturing Corporations Level:Panel Data analysis on Compustat and Patent data," Documents de Travail de l'OFCE 2005-17, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  6. Campa, Jose M. & Kedia, Simi, 2000. "Explaining the diversification discount," IESE Research Papers D/424, IESE Business School. [Downloadable!]
    Other versions:
  7. Iman van Lelyveld & Klaas Knot, 2008. "Do financial conglomerates create or destroy value? Evidence for the EU," DNB Working Papers 174, Netherlands Central Bank, Research Department. [Downloadable!]
  8. Glaser, Markus & Müller, Sebastian, 2006. "Der Diversification Discount in Deutschland: Existiert ein Bewertungsabschlag für diversifizierte Unternehmen?," Sonderforschungsbereich 504 Publications 06-13, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  9. Pasternack, Daniel & Rosenberg, Matts, 2003. "What Determines Stock Option Contract Design?," Working Papers 498, Hanken School of Economics. [Downloadable!]
  10. Campa, Jose M. & Chang, Kevin & Refalo, James F., 2000. "Options-based analysis of emerging market exchange rate expectations: Brazil's real plan, 1994-1999, An," IESE Research Papers D/425, IESE Business School. [Downloadable!]
  11. von Nandelstadh , Alexander & Rosenberg, Matts, 2003. "Corporate Governance Mechanisms and Firm Performance: Evidence from Finland," Working Papers 497, Hanken School of Economics. [Downloadable!]
  12. Owen Lamont & Christopher Polk, 2000. "Does Diversification Destroy Value? Evidence From Industry Shocks," NBER Working Papers 7803, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Laeven, Luc, 2001. "International evidence on the value of product and geographic diversity," Policy Research Working Paper Series 2729, The World Bank. [Downloadable!]
  14. Lionel Nesta, 2004. "Knowledge and Productivity in the World's Largest Manufacturing Corporations," SPRU Electronic Working Paper Series 119, University of Sussex, SPRU - Science and Technology Policy Research. [Downloadable!]
    Other versions:
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