A Manufactured Diversification Discount

59 Pages Posted: 8 Dec 2014 Last revised: 19 Jan 2017

See all articles by John Hund

John Hund

University of Georgia

Donald Monk

Yeshiva University - Syms School of Business

Sheri Tice

Tulane University - A.B. Freeman School of Business

Date Written: December 16, 2016

Abstract

The commonly used measure to assess whether corporate diversification adds or subtracts value manufactures a diversification discount by focusing solely on industry matching with the unintended consequence of matching larger and older firms to smaller and younger firms. Since size and age have been shown to be negatively associated with valuation multiples and diversified firms tend to be larger and older, this mis-matching results in a "diversification discount." We demonstrate a myriad of problems with the existing measure and create a new measure that matches on value-relevant characteristics. Using this measure, we conclude that there is no discount to diversification.

Keywords: Organizational Structure, Corporate Diversification, Firm Valuation, Coarsened Exact Matching

JEL Classification: G32, G34

Suggested Citation

Hund, John and Monk, Donald and Tice, Sheri, A Manufactured Diversification Discount (December 16, 2016). Available at SSRN: https://ssrn.com/abstract=2535017 or http://dx.doi.org/10.2139/ssrn.2535017

John Hund

University of Georgia ( email )

Athens, GA 30602
United States

Donald Monk (Contact Author)

Yeshiva University - Syms School of Business ( email )

United States

Sheri Tice

Tulane University - A.B. Freeman School of Business ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5469 (Phone)
504-865-6751 (Fax)

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