The Diversification Discount: Cash Flows vs. Returns

46 Pages Posted: 9 Jan 2000

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: October 1999

Abstract

Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flows and returns.

JEL Classification: G31, G32

Suggested Citation

Lamont, Owen A. and Polk, Christopher, The Diversification Discount: Cash Flows vs. Returns (October 1999). AFA 2001 New Orleans Meetings; Center for Research in Security Prices (CRSP) Working Paper No. 504. Available at SSRN: https://ssrn.com/abstract=188588 or http://dx.doi.org/10.2139/ssrn.188588

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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