A trade-off in corporate diversification

Manapol Ekkayokkaya, Krishna Paudyal

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)
67 Downloads (Pure)


The marginal benefits of diversification exceed the costs by a decreasing margin, and diversifying beyond the optimal level will produce a wealth loss. This trade-off predicts an inverted U-relation between the degree of diversification and wealth. We find empirical evidence in support of this trade-off proposition. Consistent with the trade-off, firms diversify cautiously and stop diversifying before the marginal benefits are offset by the costs. Our findings lend support to the arguments suggesting efficient diversification. In line with the endogeneity of diversification, the findings also indicate that the optimal level of diversification can vary across firms depending on their reasons for diversifying.
Original languageEnglish
Pages (from-to)275-292
Number of pages18
JournalJournal of Empirical Finance
Early online date6 Aug 2015
Publication statusPublished - 1 Dec 2015


  • corporate diversification
  • benefits and costs of diversification
  • non-linear wealth effect
  • acquisitions


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