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Does it really matter how a firm diversifies? Assets-in-place diversification versus growth options diversification

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  • de Andrés, Pablo
  • de la Fuente, Gabriel
  • Velasco, Pilar

Abstract

This study analyses whether the effect of corporate diversification on a firm's market value depends on how this strategy is implemented. According to the real options approach, two opposite diversification strategies may be implemented: one based on fully exercising available options (assets-in-place diversification) and the other aimed at seeding new opportunities for future growth in multiple businesses (growth options diversification). We propose an index to measure these two diversification patterns and we explore their impact on firm market value for a sample of U.S. firms during 1998–2014. We find that as a firm's diversification strategy shifts towards a growth options pattern, it becomes a more value-enhancing strategy.

Suggested Citation

  • de Andrés, Pablo & de la Fuente, Gabriel & Velasco, Pilar, 2017. "Does it really matter how a firm diversifies? Assets-in-place diversification versus growth options diversification," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 316-339.
  • Handle: RePEc:eee:corfin:v:43:y:2017:i:c:p:316-339
    DOI: 10.1016/j.jcorpfin.2017.01.011
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    References listed on IDEAS

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    Keywords

    Corporate diversification; Growth opportunities; Firm value; Investment strategy; Self-selection;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

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