The cost of diversity
the diversification discount and inefficient investment
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Author
Contributions
- Servaes, Henri. - Contributor
- Zingales, Luigi. - Contributor
- National Bureau of Economic Research. - Contributor
Publication
1998 - National Bureau of Economic Research, Cambridge, MA, Massachusetts
Language
English
Word Count
12,500 words, Guess
Page Count
50 pages
Identifiers
- OCLC Control Number38528677
- Open LibraryOL22403998M
Classifications
- LCCHB1 .W654 no. 6368
Alternate Titles
- Diversification discount and inefficient investment
Description
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.
Subjects
Topics
Places
Series Statement
- NBER working paper series -- working paper 6368
- Working paper series (National Bureau of Economic Research) -- working paper no. 6368.
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