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Explaining the Diversification Discount

  • José Manuel Campa
  • Simi Kedia

This paper argues that the documented discount on diversified firms is not per se evidence that diversification destroys value. Firms choose to diversify. We use three alternative econometric techniques to control for the endogeneity of the diversification decision, and find evidence supporting the self-selection of diversifying firms. We find a strong negative correlation between a firm's choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium. There also exists evidence of self-selection by refocusing firms. These results point to the importance of explicitly modeling the endogeneity of the diversification status in analyzing its effect on firm value. Copyright The American Finance Association 2002.

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File URL: http://www.stern.nyu.edu/eco/wkpapers/workingpapers99/99-06Campa.pdf
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 99-06.

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Date of creation: 1999
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Handle: RePEc:ste:nystbu:99-06
Contact details of provider: Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
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