Abstract
The paper discovers that firm complexity is negatively priced in cross-section. High/low-complexity conglomerates have 35-50/20-28 bp per month more negative five-factor Fama and French (2015) alphas than single-segment firms, and this effect is stronger in subsamples with low institutional ownership, higher idiosyncratic volatility, and around earnings announcements. The complexity effect is robust to controlling for a long list of pre-existing anomalies and seems to be generated by the interaction of higher uncertainty/disagreement about conglomerates (Barinov, Park, and Yildizhan, 2016) and short-sale constraints. The complexity effect seems to be contributing to the diversification discount by slowly eroding the valuations of conglomerates.
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