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Does Diversification Destroy Value? Evidence From Industry Shocks


Owen A. Lamont


Harvard University - Department of Economics

Christopher Polk


London School of Economics
July 2000

CRSP Working Paper No. 521

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.

Number of Pages in PDF File: 43

JEL Classification: G31, G32

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Date posted: July 24, 2000  

Suggested Citation

Lamont, Owen A. and Polk, Christopher, Does Diversification Destroy Value? Evidence From Industry Shocks (July 2000). CRSP Working Paper No. 521. Available at SSRN: http://ssrn.com/abstract=236139 or http://dx.doi.org/10.2139/ssrn.236139

Contact Information

Owen A. Lamont (Contact Author)
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
Christopher Polk
London School of Economics ( email )
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/polk/
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