The Diversification Discount Puzzle: Evidence for a Transaction-Cost Resolution

Financial Review, Vol. 44, Issue 1, pp. 113-135, February 2009

23 Pages Posted: 20 Jan 2009

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland; Kent State University; Kent State University Foundation

Shelly Zhao

affiliation not provided to SSRN

Abstract

The literature on the corporate diversification discount and the relative efficiency of internal versus external capital markets provides mixed results. We argue that transaction-cost economics is useful in understanding this puzzle. According to transaction-cost economics, diversified firms should outperform single segment firms in industries with higher external transaction costs (e.g., emergent industries) and under-perform in industries with low external transaction costs and high agency and other internal costs (e.g., some mature industries). This paper provides evidence supporting these contentions.

Suggested Citation

Aggarwal, Raj and Zhao, Shelly, The Diversification Discount Puzzle: Evidence for a Transaction-Cost Resolution. Financial Review, Vol. 44, Issue 1, pp. 113-135, February 2009, Available at SSRN: https://ssrn.com/abstract=1330202 or http://dx.doi.org/10.1111/j.1540-6288.2008.00212.x

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Kent State University Foundation ( email )

Akron, OH 44325-4803
United States

Shelly Zhao

affiliation not provided to SSRN

No Address Available

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