Does Diversification Destroy Value? Evidence From Industry Shocks
Owen A. Lamont
Harvard University - Department of Economics
London School of Economics
CRSP Working Paper No. 521
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, G32working papers series
Date posted: July 24, 2000
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