Value, survival, and the evolution of firm organizational structure

We examine corporate product diversification as a dynamic process. Consistent with prior research, we find that the average diversification discount is about 8% when using the standard value-multiple approach. However we find that a significant portion of the diversification discount arises from benchmark comparisons of value ratios of mature firms with those of very young firms that are more likely to have high value multiples. The magnitude of the diversification discount falls by 15% to 30% when we control for firm age. We also show that diversification reduces the mortality rate of firms, and we provide evidence that mature firms pursue diversification strategies partly as a means to exit stagnant business segments for industries that are more highly valued.