DP3461 Optimal Diversification

Author(s): Joao F Gomes, Dmitry Livdan
Publication Date: July 2002
Keyword(s): corporate strategy, diversification, diversification discount, size, total factor productivity
JEL(s): D21, G32, G34
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3461

In this Paper we show that the main empirical findings about firm diversification and performance are actually consistent with the optimal behavior of a firm that maximizes shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of economies of scale. The dynamic structure of our model allows us to examine several aspects of the relationship between firm diversification and performance in a very general setting.