Two Sides of a Coin: Endogenous and Exogenous Effects of Corporate Diversification on Firm Value


  • Xi He

    Corresponding author
    • Research School of Finance, Actuarial Studies and Applied Statistics, College of Business and Economics, Australian National University, Canberra, ACT, Australia
    Search for more papers by this author

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

Xi He

Research School of Finance, Actuarial Studies and Applied Statistics

College of Business and Economics

Australian National University

Canberra, ACT 0200



We investigate the value effects of two types of corporate diversification – unexpected exogenous diversification and endogenous diversification. Combining Heckman's sample-selection estimator with a two-stage least squares estimator and a generalized method of moments instrumental variables estimator to control for both endogeneity and sample-selection bias, we find that while an unexpected increase in diversification caused by exogenous shocks destroys firm value, an endogenous increase in diversification due to managerial decisions will enhance firm value, indicating a diversification premium from altering organizational structures.