The Diversification Discount: Cash Flows Versus Returns


  • Owen A. Lamont,

  • Christopher Polk

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    • Owen A. Lamont is at the Graduate School of Business, University of Chicago. Christopher Polk is at the Kellogg Graduate School of Management, Northwestern University. We thank Eugene F. Fama, Charles M. Jones, Darius Palia, Raghuram Rajan, Henri Servaes, Jeremy Stein, René Stultz, Tuomo Vuolteenaho, Luigi Zingales, two anonymous reviewers, and seminar participants at Chicago, Duke, Kellogg, the NBER, Virginia Tech, and Wharton for helpful comments. We thank Eugene F. Fama for providing data. Lamont gratefully acknowledges support from the Alfred P. Sloan Foundation, the Center for Research in Securities Prices at the University of Chicago Graduate School of Business, and the National Science Foundation.


Diversified firms have different values from comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flows and returns.