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http://hdl.handle.net/2451/26235
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| Title: | Explaining the Diversification Discount |
| Authors: | Campa, José Manuel
Kedia, Simi |
| Issue Date: | Apr-1999 |
| Series/Report no.: | EC-99-06 |
| Abstract: | Diversified firms trade at a discount relatively to similar
single-segment firms. We argue in this paper that this observed discount
is not per se evidence that diversification destroys value. Firms choose
to diversify. Firm characteristics, which make firms diversify, might
also cause them to be discounted. Not taking into account these firm
characteristics might wrongly attribute the observed discount to
diversification. Data from the Compustat Industry Segment File from 1978
to 1996 is used to select a sample of single segment and diversifying
firms. We use three alternative econometric techniques to control for
the endogeneity of the diversification decision. All three methods
suggest the presence of self-selection in the decision to diversify and
that a negative correlation exists between firm's choice to diversify
and firm value. We do a similar analysis in a sample of refocusing
firms. Again, some evidence of self-selection by firms exists and we now
find a positive correlation between firm's choice to refocus and firm
value. These results consistently suggest the importance of taking the
endogeneity of the diversification status into account in analyzing its
effect on firm value. |
| URI: | http://hdl.handle.net/2451/26235 |
| Appears in Collections: | Economics Working Papers
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