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Explaining the Diversification Discount

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  • Jose Manuel Campa
  • Simi Kedia

Abstract

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 selfselection of diversifying firms. We find a strong negative correlation between a firms choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium. There also exists evidence of selfselection 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.

Suggested Citation

  • Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:4:p:1731-1762
    DOI: 10.1111/1540-6261.00476
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    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F29 - International Economics - - International Factor Movements and International Business - - - Other

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