Why Firms Diversify: An Empirical Examination

Financial Management, Vol. 31, No. 1, Spring 2002

Posted: 6 Mar 2002

See all articles by David C. Hyland

David C. Hyland

Xavier University

John David Diltz

University of Texas at Arlington

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Abstract

There is substantial evidence to suggest that the market placed a lower value on diversified firms than on specialized firms during the 1980s, yet many firms diversified anyway. This article addresses why firms diversify in the first place. We use the Compustat Industry Segment database in order to identify and analyze a sample of firms that begin the study period as single-segment entities and then subsequently choose to diversify. We find evidence to support two of three possible agency cost hypotheses. Not all reported segment changes represent true economic events. Moreover, analysis of the differences between true economic diversifiers and firms whose segment change represents a nonsubstantive reporting change suggests that inadvertent inclusion of the latter in diversification studies may bias results, especially with respect to firm liquidity and q.

Suggested Citation

Hyland, David C. and Diltz, John David, Why Firms Diversify: An Empirical Examination. Financial Management, Vol. 31, No. 1, Spring 2002, Available at SSRN: https://ssrn.com/abstract=300524

David C. Hyland (Contact Author)

Xavier University ( email )

Cincinnati, OH 45207

John David Diltz

University of Texas at Arlington ( email )

Box 19449
Arlington, TX 76013
United States
817-272-3837 (Phone)

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