Why Firms Diversify: An Empirical Examination

There is substantial evidence to suggest that the market placed a lower value on diversified firms than on specialized firms during the 1980s, yet many firms diversified anyway. This article addresses why firms diversify in the first place. We use the Compustat Industry Segment database in order to...

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Bibliographic Details
Published in:Financial management 2002-04, Vol.31 (1), p.51-81
Main Authors: Hyland, David C., Diltz, J. David
Format: Article
Language:English
Subjects:
Analysis
Bids
Business enterprises
Business structures
Capital markets
Cash
Cash flow
Conglomerate corporations
Corporations
Costs
Discounts
Diversification
Divestiture
Expenditures
Hypotheses
Organizational change
Portfolio diversification
Product diversification
Proxy reporting
Proxy statements
R&D
Research & development
Research and development
Shareholders
Statistical analysis
Statistical median
Stockholders
Studies
Citations: Items that cite this one
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Summary:There is substantial evidence to suggest that the market placed a lower value on diversified firms than on specialized firms during the 1980s, yet many firms diversified anyway. This article addresses why firms diversify in the first place. We use the Compustat Industry Segment database in order to identify and analyze a sample of firms that begin the study period as single-segment entities and then subsequently choose to diversify. We find evidence to support two of three possible agency cost hypotheses. Not all reported segment changes represent true economic events. Moreover, analysis of the differences between true economic diversifiers and firms whose segment change represents a nonsubstantive reporting change suggests that inadvertent inclusion of the latter in diversification studies may bias results, especially with respect to firm liquidity and q.
ISSN:0046-3892
1755-053X
DOI:10.2307/3666321