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Does Diversification Cause the “Diversification Discount†?

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  • Villalonga, Belen

Abstract

I examine whether the discount of diversified firms can actually be attributed to diversification itself, using recent econometric developments about causal inference. The value effect of diversification is unbiasedly estimated by matching diversified and specialized firms on the propensity score––the predicted values from a probit model of the propensity to diversify. I apply this method on a sample of diversified firms that trade at a significant mean and median discount relative to specialized firms of similar size and industry. I find that, when a more comparable benchmark based on propensity scores is used, the diversification discount as such disappears or even turns into a premium.

Suggested Citation

  • Villalonga, Belen, 2000. "Does Diversification Cause the “Diversification Discount†?," University of California at Los Angeles, Anderson Graduate School of Management qt40v212gm, Anderson Graduate School of Management, UCLA.
  • Handle: RePEc:cdl:anderf:qt40v212gm
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    1. repec:dgr:rugsom:02g41 is not listed on IDEAS
    2. Hawawini, Gabriel & Subramanian, Venkat & Verdin, Paul, 2004. "The home country in the age of globalization: how much does it matter for firm performance?," Journal of World Business, Elsevier, vol. 39(2), pages 121-135, May.

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