Value, Survival, and the Evolution of Firm Organizational Structure

Abstract

We examine corporate product diversification as a dynamic process. Consistent with prior research, we find that the average diversification discount is about 8% when using the standard value-multiple approach. However, we find that a significant portion of the diversification discount arises from benchmark comparisons of value ratios of mature firms that are more likely to have low value multiples and to be diversified with those of very young firms that are more likely to have high value multiples and to be focused. The magnitude of the diversification discount falls significantly when we control for firm age, with 15% to 30% of the diversification discount being attributed to differences in the average age of diversified and focused firms. We also show that diversification reduces the mortality rate of firms, and we provide evidence that mature firms pursue diversification strategies partly as a means to exit stagnant business segments for industries that are more highly valued.

Keywords: Diversification, Firm Evolution, Survival