NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tobin's Q, Corporate Diversification and Firm Performance

Larry H.P. Lang, Rene M. Stulz

NBER Working Paper No. 4376
Issued in June 1993
NBER Program(s):   CF

In this paper, we show that Tobin's q and firm diversification are negatively related. This negative relation holds for different diversification measures and when we control for other known determinants of q. We show further that diversified firms have lower q's than equivalent portfolios of specialized firms. This negative relation holds throughout the 1980s in our sample. Finally, it holds for firms that have kept their number of segments constant over a number of years as well as for firms that have not. In our sample, firms that increase their number of segments have lower q's than firms that keep their number of segment constant. Our evidence is consistent with the view that firms seek growth through diversification when they have exhausted internal growth opportunities. We fail to find evidence supportive of the view that diversification provides firms with a valuable intangible asset

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Document Object Identifier (DOI): 10.3386/w4376

Published: Journal of Political Economy, December 1994, 1248-1280

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