Corporate Diversification and Firm Value: Evidence from Post-1997 Data


  • * The author thanks Sudipto Dasgupta, Doug Foster, Bruce Grundy, Shi Jing, Arie Melnik, Phong Ngo, John Powell, Tom Smith, Garry Twite, Ralph Walkling, Emma Welch, and seminar participants at 2006 Asian FA/FMA Conference, 2006 Financial Integrity Research Network (FIRN) PhD Finance Research Workshop and 2006 FIRN Doctoral Tutorial for helpful comments.

Xi He
School of Finance and Applied Statistics
College of Business and Economics
Australian National University
Canberra, ACT 0200


In 1997, SFAS 131 established a new segment-reporting standard for US public companies. Using measures of diversification based on the diversity in segment-industry characteristics and controlling for endogeneity of the diversification decision, we document a diversification premium in our post-1997 period. We find significant positive effects of cash flow diversity, leverage diversity and profitability diversity on excess value, consistent with the efficient internal capital market hypothesis. We also find that the size of the diversification premium in the post-1997 data is negatively correlated with the degree of diversification and positively correlated with firm size. In contrast, we find that the pre-1998 data typically generates a diversification discount, but the effect is statistically less significant when endogeneity is controlled for. Thus, the diversification discount documented in earlier studies can be an artifact of the pre-1998 data or a failure to control for endogeneity.