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Explaining the Diversification Discount

  • Jose Manuel Campa

    (IESE Business School, Madrid, Spain,)

  • Simi Kedia

    (Harvard University)

This paper argues that the documented discount on diversified firms is not per se evidence that diversification destroys value. Firms choose to diversify. We use three alternative econometric techniques to control for the endogeneity of the diversification decision, and find evidence supporting the self-selection of diversifying firms. We find a strong negative correlation between a firm's choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium. There also exists evidence of self-selection by refocusing firms. These results point to the importance of explicitly modeling the endogeneity of the diversification status in analyzing its effect on firm value. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 4 (08)
Pages: 1731-1762

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:4:p:1731-1762
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