Does Diversification Destroy Value? Evidence from Industry Shocks

Lamont, Owen A.; Polk, Christopher

doi:10.2139/ssrn.236139

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Does Diversification Destroy Value? Evidence from Industry Shocks

43 Pages Posted: 24 Jul 2000

See all articles by Owen A. Lamont

Owen A. Lamont

Harvard University - Department of Economics

Christopher Polk

London School of Economics

There 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.

JEL Classification: G31, G32

Suggested Citation: Suggested Citation

Lamont, Owen A. and Polk, Christopher, Does Diversification Destroy Value? Evidence from Industry Shocks (July 2000). Available at SSRN: https://ssrn.com/abstract=236139 or http://dx.doi.org/10.2139/ssrn.236139