Does Diversification Destroy Value? Evidence from Industry Shocks
43 Pages Posted: 24 Jul 2000
Date Written: July 2000
Does corporate diversification reduce shareholder value? Since firms endogenously choose to diversify, exogenous variation in diversification is necessary in order to draw inferences about the causal effect. We examine changes in the within-firm dispersion of industry investment, or "diversity." We find that exogenous changes in diversity, due to changes in industry investment, are negatively related to firm value. Thus diversification destroys value, consistent with the inefficient internal capital markets hypothesis. This finding is not caused by measurement error. We also find that exogenous changes in industry cash flow diversity are negative related to firm value.
JEL Classification: G31, G32
Suggested Citation: Suggested Citation