Why agency costs explain diversification discounts

Henrik Cronqvist, Peter Högfeldt, Mattias Nilsson

Research output: Contribution to journalArticlepeer-review

25 Scopus citations


We study diversification within the real estate industry because of its relative transparency: portfolio management of assets with well-defined market prices. Diversification is over property types and geographical regions. The major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue nonfocusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, are predominantly privately controlled and use dual-class shares extensively. The ex ante diversification discount is, therefore, a measure of agency costs.

Original languageEnglish (US)
Pages (from-to)85-126
Number of pages42
JournalReal Estate Economics
Issue number1
StatePublished - Jan 1 2001
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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