Does Diversification Destroy Value? Evidence from Industry Shocks

42 Pages Posted: 2 May 2011

See all articles by Owen A. Lamont

Owen A. Lamont

Harvard University - Department of Economics

Christopher Polk

London School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2000

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.

Suggested Citation

Lamont, Owen A. and Polk, Christopher, Does Diversification Destroy Value? Evidence from Industry Shocks (July 2000). NBER Working Paper No. w7803. Available at SSRN: https://ssrn.com/abstract=1825786

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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