Strategic cost of diversification

Research output: Contribution to journalArticlepeer-review


This article proposes a new explanation for the large cross-sectional variation in the excess values of diversified firms. The model applies the idea of shareholders limited liability affecting firms output market strategies to the analysis of financial and operating choices of conglomerates. The inability of conglomerates to commit to unconstrained optimal operating strategies, following from the lack of flexibility in choosing their divisions capital structures, reduces their value. Thus, the model highlights a new type of inefficiency of the conglomerate organizational structure, which is suboptimal financing. The predictions of the model are generally supported by the data.

Original languageEnglish
Pages (from-to)1901-1940
Number of pages40
JournalReview of Financial Studies
Issue number6
StatePublished - Nov 2007
Externally publishedYes


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