The diversification discount: Cash flows versus returns

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Publication Details

Output type: Journal article

Author list: Lamont OA, Polk C

Publisher: Wiley

Publication year: 2001

Journal: The Journal of Finance (0022-1082)

Volume number: 56

Issue number: 5

Start page: 1693

End page: 1721

Number of pages: 29

ISSN: 0022-1082

eISSN: 1540-6261

Languages: English-Great Britain (EN-GB)

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Open access status: closed

Abstract

Diversified firms have different values from 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 flows and returns.

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