Specialization in Investor Information and the Diversification Discount

55 Pages Posted: 14 Aug 2018

See all articles by Ronaldo Carpio

Ronaldo Carpio

University of International Business & Economics

Meixin Guo

Tsinghua University, SEM

Date Written: July 28, 2018

Abstract

We present a theory of the diversification discount based on investor specialization in information; this is modeled by different investors having a lower belief variance for different assets. We show that a discount exists in a general multi-asset, multi-investor setting; the discount increases with the degree of information specialization among investors. We empirically test our model using corporate spinoffs from the USA, using a novel measure of industry similarity based on sell-side analyst behavior. We find that higher abnormal returns on the spinoff announcement date are associated with higher industry dissimilarity between parent and child firms.

Keywords: Diversification Discount, Heterogeneous Beliefs

JEL Classification: G14, G34

Suggested Citation

Carpio, Ronaldo and Guo, Meixin, Specialization in Investor Information and the Diversification Discount (July 28, 2018). Available at SSRN: https://ssrn.com/abstract=3221595 or http://dx.doi.org/10.2139/ssrn.3221595

Ronaldo Carpio (Contact Author)

University of International Business & Economics ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

HOME PAGE: http://rncarpio.com

Meixin Guo

Tsinghua University, SEM ( email )

448 Weilun SEM
Tsinghua University
Beijing, Beijing 100084
China

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