NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Conglomerate Industry Choice and Product Di fferentiation

Gerard Hoberg, Gordon M. Phillips

NBER Working Paper No. 17221
Issued in July 2011
NBER Program(s):   CF   IO

We use text-based computational analysis of business descriptions from 10-Ks to examine in which industries conglomerates are most likely to operate and to understand conglomerate valuations. We find that conglomerates are more likely to operate in industry pairs that are closer together in the product space and in industry pairs that have profitable opportunities "between" them. Conglomerate firms have lower stock market valuations than matched single-segment firms when their products are easier to replicate with single-segment firms. Conglomerate firms have stock market premiums when they have higher product differentiation and produce in more profitable industries. These findings are consistent with successful conglomerate firms having higher product differentiation and lower cost entry into profitable markets when operating in strategically chosen industry pairs.

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This paper was revised on February 7, 2012

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Document Object Identifier (DOI): 10.3386/w17221

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