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The Berger–Ofek Diversification Discount Is Just Poor Firm Matching

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  • John E. Hund
  • Donald Monk
  • Sheri Tice

Abstract

The widely used measure of diversification value developed by Berger and Ofek (1995) consistently matches large and old diversified firms with small and young focused firms. Since valuation multiples decline with sales and age this approach manufactures a discount. We develop a new measure based on sales and age matching and show that it leads to different and more intuitive conclusions. Using daily returns, we conclude that sales and age matched firms are more than twice as correlated with diversified firms than firms chosen by the Berger and Ofek (1995) methodology and the return-weighted discount is zero. For most firms, the diversification discount is an artifact of the methods used to create it.

Suggested Citation

  • John E. Hund & Donald Monk & Sheri Tice, 2024. "The Berger–Ofek Diversification Discount Is Just Poor Firm Matching," Critical Finance Review, now publishers, vol. 13(1-2), pages 1-44, February.
    • Handle: RePEc:now:jnlcfr:104.00000135
    DOI: 10.1561/104.00000135
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