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Diversification's effect on firm value

1995; Elsevier BV; Volume: 37; Issue: 1 Linguagem: Inglês

10.1016/0304-405x(94)00798-6

1879-2774

Philip G. Berger, Eli Ofek,

Financial Reporting and Valuation Research

We estimate diversification's effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firm's actual value implies a 13% to 15% average value loss from diversification during 1986–1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment and cross-subsidization contribute to the value loss. The loss is reduced modestly by tax benefits of diversification.