Diversification's effect on firm value

Philip G. Berger · Eli Ofek A

3,069 citations0/0 files storedJournal of Financial Economics

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Corporate Finance and Governance Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

We estimate diversification's effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firm's actual value implies a 13% to 15% average value loss from diversification during 1986–1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment and cross-subsidization contribute to the value loss. The loss is reduced modestly by tax benefits of diversification.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1977Determinants of corporate borrowing 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1990Managerial discretion and optimal financing policies 1994Tobin's q, Corporate Diversification, and Firm Performance 1980Financial Theory and Corporate Policy.1999Eclipse of the Public Corporation

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