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The Cost of Diversity: The Diversification Discount and Inefficient Investment / Raghuram Rajan, Henri Servaes, Luigi Zingales.
- Format:
- Book
- Author/Creator:
- Rajan, Raghuram.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w6368.
- NBER working paper series no. w6368
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- The Cost of Diversity
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 1998.
- Summary:
- In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.
- Notes:
- Print version record
- January 1998.
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