Firm Complexity and Conglomerates Expected Returns
74 Pages Posted: 24 Mar 2018 Last revised: 7 Jul 2020
Date Written: June 30, 2020
The paper discovers that firm complexity is negatively priced in cross-section. High/low-complexity conglomerates have 35-50/20-28 bp per month more negative five-factor Fama and French (2015) alphas than single-segment firms, and this effect is stronger in subsamples with low institutional ownership, higher idiosyncratic volatility, and around earnings announcements. The complexity effect is robust to controlling for a long list of pre-existing anomalies and seems to be generated by the interaction of higher uncertainty/disagreement about conglomerates (Barinov, Park, and Yildizhan, 2016) and short-sale constraints. The complexity effect seems to be contributing to the diversification discount by slowly eroding the valuations of conglomerates.
Keywords: conglomerates, anomalies, mispricing, limits to arbitrage, diversification discount
JEL Classification: G12, G14, G34
Suggested Citation: Suggested Citation