Firm Complexity and Conglomerates Expected Returns

74 Pages Posted: 24 Mar 2018 Last revised: 7 Jul 2020

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

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

Barinov, Alexander, Firm Complexity and Conglomerates Expected Returns (June 30, 2020). Available at SSRN: or

Alexander Barinov (Contact Author)

University of California Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
585-698-7726 (Phone)


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