Why Agency Costs Explain Diversification Discounts

Posted: 21 May 2001

See all articles by Peter Högfeldt

Peter Högfeldt

Stockholm School of Economics - Department of Finance; European Corporate Governance Institute (ECGI)

Henrik Cronqvist

University of Miami - Department of Finance

Mattias Nilsson

U.S. Securities and Exchange Commission

Abstract

We study diversification within the real estate industry because of its relative transparency: portfolio management of assets with well-defined market prices. Diversification is over property types and geographical regions. The major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue non-focusing strategies do indeed diversify more; are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy; are predominantly privately controlled and extensively using dual-class shares. The ex ante diversification discount is therefore a measure of agency costs.

Keywords: Diversification, diversifying strategy, ex ante discounts, rent dissipation, agency costs, private control

JEL Classification: G30, G31, G32

Suggested Citation

Högfeldt, Peter and Cronqvist, Henrik and Nilsson, Mattias, Why Agency Costs Explain Diversification Discounts. Real Estate Economics, Vol. 29, No. 1, 2001. Available at SSRN: https://ssrn.com/abstract=246902

Peter Högfeldt (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

Box 6501
SE-113 83 Stockholm
Sweden
+46 8 7169151 (Phone)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Henrik Cronqvist

University of Miami - Department of Finance ( email )

5250 University Drive
314-E Jenkins Building
Coral Gables, FL 33146
United States
(305) 284-9482 (Phone)

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

Mattias Nilsson

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
United States

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