Costly refocusing,the diversification discount,and the pervasiveness of diversified firms |
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| Authors: | Fernando Anjos |
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| Affiliation: | 1. Universidad Católica Argentina, Facultad de Ciencias Económicas, Buenos Aires, Argentina;2. University of Texas at Austin, McCombs School of Business, 2110 Speedway, Stop B6600, Austin, TX 78751, United States;1. Economics Department, Rutgers University-Camden, Camden, NJ 08102, USA;2. Psychology Department, Santa Clara University, Santa Clara, CA 95053, USA;1. TU Bergakademie Freiberg, Institute of Industrial Management, Operations and Logistics, Freiberg, Germany;2. TU Bergakademie Freiberg, Institute of Metal Forming, Freiberg, Germany;3. Hamburg University of Technology (TUHH), Institute of Human Resource Management and Organizations, Hamburg, Germany;4. The University of Newcastle, Faculty of Business and Law, Newcastle, Australia;1. Cornell University, United States;2. Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166, USA |
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| Abstract: | I develop a stationary real options model with corporate restructuring costs that endogenously generates a diversification discount. This result requires that restructuring costs associated with spin-offs (refocusing moves) be significantly larger than those associated with acquisitions (diversifying moves). The discount is due to the fact that diversified firms performing poorly will still delay refocusing, given the high cost of implementing this strategy. The model delivers the counter-intuitive implication that the higher the (average) discount observed in the economy, the higher the (average) proportion of diversified firms. |
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