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Costly refocusing, the diversification discount, and the pervasiveness of diversified firms

  • Anjos, Fernando

I develop a stationary real options model with corporate restructuring costs that endogenously generates a diversification discount. This result requires that restructuring costs associated with spin-offs (refocusing moves) be significantly larger than those associated with acquisitions (diversifying moves). The discount is due to the fact that diversified firms performing poorly will still delay refocusing, given the high cost of implementing this strategy. The model delivers the counter-intuitive implication that the higher the (average) discount observed in the economy, the higher the (average) proportion of diversified firms.

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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 16 (2010)
Issue (Month): 3 (June)
Pages: 276-287

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Handle: RePEc:eee:corfin:v:16:y:2010:i:3:p:276-287
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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