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Technological Specialization and the Decline of Diversified Firms

40 Pages Posted: 3 Sep 2011 Last revised: 30 Apr 2017

Fernando Anjos

NOVA School of Business and Economics

Cesare Fracassi

University of Texas at Austin

Date Written: April 28, 2017

Abstract

We document a strong decline in corporate-diversification activity since the late 1970's, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.

Keywords: corporate diversification, specialization, mergers, matching

JEL Classification: D2, G32, G34, L25

Suggested Citation

Anjos, Fernando and Fracassi, Cesare, Technological Specialization and the Decline of Diversified Firms (April 28, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1921073 or http://dx.doi.org/10.2139/ssrn.1921073

Fernando Anjos (Contact Author)

NOVA School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

HOME PAGE: http://sites.google.com/site/fernandoanjossite/

Cesare Fracassi

University of Texas at Austin ( email )

McCombs School of Business
2110 Speedway Stop B6600
Austin, TX 78712-1276
United States
512-232-6843 (Phone)

HOME PAGE: http://https://faculty.mccombs.utexas.edu/cesare.fracassi/

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