Divisional diversity and the conglomerate discount: Evidence from spinoffs

Timothy Burch, Vikram Nanda

Research output: Contribution to journalArticle

58 Citations (Scopus)

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

Fingerprint

Spin-offs
Conglomerate discount
Spin-off
Diversified firms
Costs
Industry
Firm value
Measurement error
Investment opportunities
Selection bias
Diversification discount

Keywords

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

ASJC Scopus subject areas

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

Cite this

Divisional diversity and the conglomerate discount : Evidence from spinoffs. / Burch, Timothy; Nanda, Vikram.

In: Journal of Financial Economics, Vol. 70, No. 1, 01.10.2003, p. 69-98.

Research output: Contribution to journalArticle

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