Does Corporate Diversification Destroy Value?

Posted: 24 Sep 2001

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Michael L. Lemmon

University of Utah - Department of Finance

Jack G. Wolf

Clemson University - Department of Finance

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We analyze several hundred firms that expand via acquisition and/or increase their reported number of business segments. The average combined market reaction to acquisition announcements is positive but, according to the Berger and Ofek (1995) method for valuing conglomerates, the excess values of the acquiring firms decline after the diversifying event. For our sample, half or more of the reduction in excess value occurs because the firms acquire already-discounted business units, and not because combining firms destroys value. We also show that firms that increase their number of business segments due to pure reporting changes do not exhibit reductions in excess value. Our results suggest that the standard assumption that conglomerate divisions can be benchmarked to typical stand-alone firms should be carefully reconsidered.

Keywords: Corporate diversification; Diversification discount; Excess value

JEL Classification: G12, G34

Suggested Citation

Graham, John Robert and Lemmon, Michael L. and Wolf, Jack G., Does Corporate Diversification Destroy Value?. Available at SSRN:

John Robert Graham

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
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United States
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Jack G. Wolf (Contact Author)

Clemson University - Department of Finance ( email )

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Clemson, SC 29634
United States
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864-656-3748 (Fax)

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