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The Diversification Discount: Cash Flows vs. Returns

  • Owen Lamont
  • Christopher Polk

Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flow and returns.

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File URL: http://www.nber.org/papers/w7396.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7396.

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Date of creation: Oct 1999
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Publication status: published as Lamont, Owen A. and Christopher Polk. "The Diversification Discount: Cash Flows Versus Returns," Journal of Finance, 2001, v56(5,Oct), 1693-1721.
Handle: RePEc:nbr:nberwo:7396
Note: AP CF ME
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  1. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
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  9. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  10. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
  11. Pontiff, Jeffrey, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1135-51, November.
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