TY  - JOUR
AU  - Rajan,Raghuram
AU  - Servaes,Henri
AU  - Zingales,Luigi
TI  - The Cost of Diversity: The Diversification Discount and Inefficient Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6368
PY  - 1998
Y2  - January 1998
UR  - http://www.nber.org/papers/w6368
L1  - http://www.nber.org/papers/w6368.pdf
N1  - Author contact info:
Raghuram Rajan
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-4437
Fax: 773/702-0458
E-Mail: raghuram.rajan@ChicagoBooth.edu

Henri Servaes
London Business School-IFA
Sussex Place
Regent's Park
London NW1 4SA
ENGLAND
E-Mail: hservaes@london.edu

Luigi Zingales
Booth School of Business
The University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-3196
Fax: 773/834-2081
E-Mail: luigi.zingales@ChicagoBooth.edu
M2  - featured in NBER digest on 1998-09-01
AB  - In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions.  The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993.  We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.
ER  -