Does Diversification Destroy Value? Evidence From Industry Shocks

No 7803, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Does corporate diversification reduce shareholder value? Since firms endogenously choose to diversify, exogenous variation in diversification is necessary in order 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. This finding is not caused by measurement error. We also find that exogenous changes in industry cash flow diversity are negative related to firm value.

JEL-codes: G34 (search for similar items in EconPapers)
Date: 2000-07
New Economics Papers: this item is included in nep-cfn, nep-ind and nep-tid
Note: AP CF
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Citations: View citations in EconPapers (4)

Published as Lamont, Owen A. and Christopher Polk. "Does Diversification Destroy Value? Evidence From The Industry Shocks," Journal of Financial Economics, 2002, v63(1,Jan), 51-77.

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Journal Article: Does diversification destroy value? Evidence from the industry shocks (2002)
Working Paper: Does Diversification Destroy Value? Evidence from Industry Shocks."
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