40 Pages Posted: 3 Sep 2011 Last revised: 30 Apr 2017
Date Written: April 28, 2017
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: 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
By Pat Akey