Corporate Refocusing

During the 1980s, many conglomerates and other diversified firms reduced their diversification by refocusing on their core businesses. This paper provides an economic explanation for this phenomenon. It is argued that: (a) refocusing represents the natural response of firms to a more volatile external environment and a more competitive capital market; and (b) over-diversified firms that refocus will achieve improved profitability and a higher market value, and will thus protect themselves from hostile takeover.