Abstract
There is substantial evidence to suggest that the market placed a lower value on diversified firms than on specialized firms during the 1980s, yet many firms diversified anyway. This article addresses why firms diversify in the first place. We use the Compustat Industry Segment database in order to identify and analyze a sample of firms that begin the study period as single-segment entities and then subsequently choose to diversify. We find evidence to support two of three possible agency cost hypotheses. Not all reported segment changes represent true economic events. Moreover, analysis of the differences between true economic diversifiers and firms whose segment change represents a nonsubstantive reporting change suggests that inadvertent inclusion of the latter in diversification studies may bias results, especially with respect to firm liquidity and q.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
