Technological Specialization and the Decline of Diversified Firms
NOVA School of Business and Economics
University of Texas at Austin
September 29, 2015
We document a strong decline in corporate-diversification activity since the late 1970's, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.
Number of Pages in PDF File: 60
Keywords: corporate diversification, specialization, mergers, matching
JEL Classification: D2, D57, G34, L14, L25
Date posted: September 3, 2011 ; Last revised: September 30, 2015
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