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In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.
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The cost of diversity: the diversification discount and inefficient investment
1998, National Bureau of Economic Research
in English
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Book Details
Published in
Cambridge, MA
Edition Notes
"January 1998."
JEL no. G31, L22.
Includes bibliographical references (p. 50).
Electronic access limited to Binghamton University faculty, staff and students for instructional and research purposes only.
Electronic version available via the Internet at the NBER World Wide Web site.
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