Working Paper: NBER ID: w17221
Authors: Gerard Hoberg; Gordon M. Phillips
Abstract: We use text-based computational analysis of business descriptions from 10-Ks to examine in which industries conglomerates are most likely to operate and to understand conglomerate valuations. We find that conglomerates are more likely to operate in industry pairs that are closer together in the product space and in industry pairs that have profitable opportunities "between" them. Conglomerate firms have lower stock market valuations than matched single-segment firms when their products are easier to replicate with single-segment firms. Conglomerate firms have stock market premiums when they have higher product differentiation and produce in more profitable industries. These findings are consistent with successful conglomerate firms having higher product differentiation and lower cost entry into profitable markets when operating in strategically chosen industry pairs.
Keywords: conglomerates; product differentiation; industry choice; valuation
JEL Codes: G34; L1; L22; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Closer product characteristics (L15) | Conglomerate operations (L22) |
| Ease of product replicability (L15) | Stock market valuations of conglomerate firms (L22) |
| Higher product differentiation (L15) | Stock market valuations of conglomerate firms (L22) |
| Industry characteristics (L81) | Valuation of conglomerates (L22) |
| Spanning high-value industries (L60) | Valuation of conglomerates (L22) |