Does diversification destroy value? Evidence from the industry shocks

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Publication Details

Output type: Journal article

Author list: Lamont OA, Polk C

Publisher: Elsevier

Publication year: 2002

Journal: Journal of Financial Economics (0304-405X)

Volume number: 63

Issue number: 1

Start page: 51

End page: 77

Number of pages: 27

ISSN: 0304-405X

eISSN: 1879-2774

Languages: English-Great Britain (EN-GB)

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Open access status: green

Full text URL: http://papers.nber.org/papers/w7803.pdf

Abstract

Does corporate diversification reduce shareholder value? Since firms endogenously choose to diversify, exogenous variation in diversification is necessary to draw inferences about the causal effect. We examine changes in the within-firm dispersion of industry investment, or "diversity". We find that exogenous changes in diversity, due to changes in industry investment, are negatively related to firm value. Thus diversification destroys value, consistent with the inefficient internal capital markets hypothesis. Measurement error does not cause this finding, We also find that exogenous changes in industry cash flow diversity are negatively related to firm value. (C) 2002 Elsevier Science S.A, All rights reserved.

Keywords

diversified firms, internal capital markets

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