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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," 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. Nippa, Michael, 2011. "Zur Notwendigkeit des Corporate Portfolio Management: Eine W├╝rdigung der wissenschaftlichen Forschung der letzten vier Jahrzehnte," Freiberg Working Papers 2011,02, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    2. Pasquale Massimo Picone & Giovanni Battista Dagnino, 2016. "Revamping research on unrelated diversification strategy: perspectives, opportunities and challenges for future inquiry," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 413-445, September.

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