Working Paper: CEPR ID: DP3461
Authors: Joao Gomes; Dmitry Livdan
Abstract: In this Paper we show that the main empirical findings about firm diversification and performance are actually consistent with the optimal behavior of a firm that maximizes shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of economies of scale. The dynamic structure of our model allows us to examine several aspects of the relationship between firm diversification and performance in a very general setting.
Keywords: corporate strategy; diversification; diversification discount; size; total factor productivity
JEL Codes: D21; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Diversification (G11) | lower productivity (O49) |
| large firms (L25) | more likely to diversify (F29) |
| size (L25) | lower marginal productivity of capital (D24) |
| diversification (G11) | diversification discount (G39) |
| self-selection of firms that choose to diversify (L25) | less productive firms (D22) |