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Diversification's effect on firm value

Journal of Financial Economics · 1995 · Vol. 37(1) · pp. 39–65
Philip G. BergerEli Ofek

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.

Corporate Finance and GovernanceCorporate Taxation and AvoidanceFinancial Reporting and Valuation ResearchDiversification (marketing strategy)Enterprise valueValue (mathematics)EconomicsMicroeconomicsSubsidyBusinessEconometricsStatisticsFinance
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References
Determinants of corporate borrowing
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Managerial discretion and optimal financing policies
Journal of Financial Economics · 1990 · 3,750 citations
Tobin's q, Corporate Diversification, and Firm Performance
Journal of Political Economy · 1994 · 2,504 citations
Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers
American Economic Review · 1986 · 17,570 citations
Takeovers: Their Causes and Consequences
The Journal of Economic Perspectives · 1988 · 1,321 citations
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