CFA Digest · 2003 · 15 citations · 0 references
BusinessBusiness EconomicsEconomicsCorporate StrategyDiversification StrategyEconometricsCorporate DiversificationDiversification RatesCorrelationDeterminants Of Firm ValueDiversification DiscountDiversification PremiumEconometric IdentificationFirm Value EffectsIndustry DiversificationPerformance Effects Of Diversification
Firms choose to diversify. The paper argues that the documented diversification discount does not necessarily indicate value destruction and uses three econometric techniques to control for endogeneity, finding evidence of self‑selection among diversifying firms. The authors employ three alternative econometric techniques to control for the endogeneity of the diversification decision. The study finds a strong negative correlation between diversification and firm value, but the discount diminishes—sometimes becoming a premium—and highlights the role of self‑selection and the need to model endogeneity.
ABSTRACT This paper argues that the documented discount on diversified firms is not per se evidence that diversification destroys value. Firms choose to diversify. We use three alternative econometric techniques to control for the endogeneity of the diversification decision, and find evidence supporting the selfselection of diversifying firms. We find a strong negative correlation between a firms choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium. There also exists evidence of selfselection by refocusing firms. These results point to the importance of explicitly modeling the endogeneity of the diversification status in analyzing its effect on firm value.