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.