Tobin's Q, Corporate Diversification and Firm Performance

Abstract

In this paper, we show that Tobin's q and firm diversification are negatively related throughout the 1980s. This negative relation holds for different diversification measures and when we control for other known determinants of q. Further, diversified firms have lower q's than portfolios of pure-play firms active in the same industries as the divisions of the diversified firms. In our sample, the firms that choose to diversify are poor performers relative to firms that do not, but there is only weak evidence that they have lower q's than the firms in their industry. We find no evidence supportive of the view that diversification provides firms with a valuable intangible asset.

JEL Classification: G3, G31