Does Corporate Diversification Destroy Value?
Article first published online: 17 DEC 2002
The American Finance Association 2002
The Journal of Finance
Volume 57, Issue 2, pages 695–720, April 2002
How to Cite
Graham, J. R., Lemmon, M. L. and Wolf, J. G. (2002), Does Corporate Diversification Destroy Value?. The Journal of Finance, 57: 695–720. doi: 10.1111/1540-6261.00439
- Issue published online: 17 DEC 2002
- Article first published online: 17 DEC 2002
- Cited By
We analyze several hundred firms that expand via acquisition and/or increase their number of business segments. The combined market reaction to acquisition announcements is positive but acquiring firm excess values decline after the diversifying event. Much of the excess value reduction occurs because our sample firms acquire already discounted business units, and not because diversifying destroys value. This implies that the standard assumption that conglomerate divisions can be benchmarked to typical stand-alone firms should be carefully reconsidered. We also show that excess value does not decline when firms increase their number of business segments because of pure reporting changes.