Divisional diversity and the conglomerate discount: Evidence from spinoffs

Timothy R. Burch, Vikram Nanda

Research output: Contribution to journalArticle

60 Scopus citations

Abstract

Existing literature argues that disparity in investment opportunities within diversified firms can erode firm value. We investigate the diversity cost hypothesis of spinoffs by using post-spinoff data to (1) reconstruct the diversified firm after the spinoff and assess the aggregate improvement in value and (2) relate any value improvements to changes in diversity. We find that improvements in aggregate value depend significantly on changes in both a direct measure of diversity and measures based on industry proxies. We conclude that diversification discounts at least partially reflect a value loss due to the diversified nature of the firm itself, rather than selection bias or measurement error.

Original languageEnglish (US)
Pages (from-to)69-98
Number of pages30
JournalJournal of Financial Economics
Volume70
Issue number1
DOIs
StatePublished - Oct 1 2003

Keywords

  • Diversification discount
  • Diversified firms
  • Internal capital markets
  • Spinoff

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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