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Does Diversification Cause the "Diversification Discount"?

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  • Belén Villalonga

Abstract

Using recent econometric developments about causal inference, I examine whether diversification destroys value. I estimate the value effect of diversification by matching diversifying and single-segment firms on their propensity score––the predicted values from a probit model of the propensity to diversify. I also use Heckman’s (1979) two-stage estimator for comparison purposes. I find that on average, diversification does not destroy value. This finding is robust to the choice of estimator, sample, measures of excess value, and specification.

Suggested Citation

  • Belén Villalonga, 2004. "Does Diversification Cause the "Diversification Discount"?," Financial Management, Financial Management Association, vol. 33(2), Summer.
  • Handle: RePEc:fma:fmanag:villalonga04
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