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The Diversification Discount: Cash Flows Versus Returns

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  • Owen A. Lamont
  • Christopher Polk

Abstract

Diversified firms have different values from 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 flows and returns.

Suggested Citation

  • Owen A. Lamont & Christopher Polk, 2001. "The Diversification Discount: Cash Flows Versus Returns," Journal of Finance, American Finance Association, vol. 56(5), pages 1693-1721, October.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:5:p:1693-1721
    DOI: 10.1111/0022-1082.00386
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