A Manufactured Diversification Discount

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