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The Apparent Diversification Discount

Author

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  • Michela Altieri
  • Giovanna Nicodano

Abstract

Our model highlights the impact of bankruptcy on (true and apparent) firm value. We show that the pricing of diversified firms suffers from a survivorship bias, due to their lower mortality relative to focused ones. This difference in mortality is able to turn a true diversification premium, deriving from saved bankruptcy costs, into an apparent diversification discount. Such apparent discount is larger the larger is the true premium due to coinsurance across diversified units. We show how this insight contributes to explain value paradoxes in diversified companies such as multi-unit groups, multi-segment conglomerates, and parent companies.

Suggested Citation

  • Michela Altieri & Giovanna Nicodano, 2016. "The Apparent Diversification Discount," Carlo Alberto Notebooks 465, Collegio Carlo Alberto.
  • Handle: RePEc:cca:wpaper:465
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    More about this item

    Keywords

    bankruptcy costs; coinsurance; contagion; limited liability; diversification discount; survivorship bias; parent company discount; cost of debt;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • K19 - Law and Economics - - Basic Areas of Law - - - Other

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