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Strategic Cost of Diversification

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  • Evgeny Lyandres

Abstract

This article proposes a new explanation for the large cross-sectional variation in the excess values of diversified firms. The model applies the idea of shareholders' limited liability affecting firms' output market strategies to the analysis of financial and operating choices of conglomerates. The inability of conglomerates to commit to unconstrained optimal operating strategies, following from the lack of flexibility in choosing their divisions' capital structures, reduces their value. Thus, the model highlights a new type of inefficiency of the conglomerate organizational structure, which is suboptimal financing. The predictions of the model are generally supported by the data. , Oxford University Press.

Suggested Citation

  • Evgeny Lyandres, 2007. "Strategic Cost of Diversification," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1901-1940, November.
    • Handle: RePEc:oup:rfinst:v:20:y:2007:i:6:p:1901-1940
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    File URL: http://hdl.handle.net/10.1093/rfs/hhm047
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    Cited by:

    1. Viswanathan Nagarajan & Pitabas Mohanty & Apalak Khatua, 2023. "Financing effects of corporate diversification: A review," Review of Managerial Science, Springer, vol. 17(7), pages 2555-2585, October.
    2. Ron Adner & Peter Zemsky, 2016. "Diversification and Performance: Linking Relatedness, Market Structure, and the Decision to Diversify," Strategy Science, INFORMS, vol. 1(1), pages 32-55, March.
    3. Nippa, Michael, 2011. "Zur Notwendigkeit des Corporate Portfolio Management: Eine Würdigung der wissenschaftlichen Forschung der letzten vier Jahrzehnte," Freiberg Working Papers 2011/02, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    4. Jieying Hong & Rui Zhang, 2023. "Manager‐specific shocks, financial constraints and conglomerate merger," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 46-59, February.

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