NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Diversification Destroy Value? Evidence From Industry Shocks

Owen Lamont, Christopher Polk

NBER Working Paper No. 7803
Issued in July 2000
NBER Program(s):   AP   CF

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.

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Document Object Identifier (DOI): 10.3386/w7803

Published: Lamont, Owen A. and Christopher Polk. "Does Diversification Destroy Value? Evidence From The Industry Shocks," Journal of Financial Economics, 2002, v63(1,Jan), 51-77.

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