The Performance of Optimally Diversified Firms: Reconciling Theory and Evidence

32 Pages Posted: 23 Oct 2002

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Dmitry Livdan

University of California, Berkeley

Date Written: September 2002

Abstract

We construct an equilibrium model of firm diversification to show that the main empirical findings about firm diversification and performance are consistent with the maximization of shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of synergies. By explicitly linking the diversification strategies of the firm to differences in size and productivity, our model provides a natural laboratory to quantitatively investigate several aspects of the relationship between diversification and performance. Specifically, we show that our model is able to rationalize both the evidence on the diversification discount (Lang and Stulz (1994)) and the observed relation between diversification and firm productivity (Schoar (2002)).

Keywords: firm diversification, Tobin's Q, diversification discount, total factor productivity

JEL Classification: D21, G32, G34

Suggested Citation

Gomes, João F. and Livdan, Dmitry, The Performance of Optimally Diversified Firms: Reconciling Theory and Evidence (September 2002). CEPR Discussion Paper No. 3546. Available at SSRN: https://ssrn.com/abstract=342273

João F. Gomes (Contact Author)

The Wharton School ( email )

2329 SH-DH
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215-898-3666 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

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