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Diversification, Ricardian Rents, and Tobin's q

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  • Cynthia A. Montgomery
  • Birger Wernerfelt

Abstract

According to prevailing theory, firms diversify in response to excess capacity of factors that are subject to market failure. By probing into the heterogeneity of these factors, we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents. An empirical test, with Tobin's q as the measure of rents, is consistent with this theory.

Suggested Citation

  • Cynthia A. Montgomery & Birger Wernerfelt, 1988. "Diversification, Ricardian Rents, and Tobin's q," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 623-632, Winter.
    • Handle: RePEc:rje:randje:v:19:y:1988:i:winter:p:623-632
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