The cost of diversity
Subtitle: the diversification discount and inefficient investment
By: Raghuram Rajan, Henri Servaes, Luigi Zingales.
Contributors: Servaes, Henri.; Zingales, Luigi.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 6368; Working paper series (National Bureau of Economic Research) -- working paper no. 6368.
Publisher: National Bureau of Economic Research
Published: 1998
Place of publication: Cambridge, MA
Language: eng
Number of pages: 50
Subjects: Diversification in industry -- United States -- Econometric models.; Resource allocation -- Econometric models.; Capital investments -- United States -- Econometric models.; Capital budget -- Econometric models.
Other titles: Diversification discount and inefficient investment
Description: 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.
Notes: "January 1998."

JEL no. G31, L22.

Includes bibliographical references (p. 50).

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