A trade-off in corporate diversification

Manapol Ekkayokkaya, Krishna Paudyal

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

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.
LanguageEnglish
Pages275-292
Number of pages18
JournalJournal of Empirical Finance
Volume34
Early online date6 Aug 2015
DOIs
Publication statusPublished - 1 Dec 2015

Fingerprint

Corporate diversification
Diversification
Trade-offs
Wealth
Costs
Empirical evidence
Endogeneity
Margin
Inverted-U

Keywords

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

Cite this

Ekkayokkaya, Manapol ; Paudyal, Krishna. / A trade-off in corporate diversification. In: Journal of Empirical Finance. 2015 ; Vol. 34. pp. 275-292.
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A trade-off in corporate diversification. / Ekkayokkaya, Manapol; Paudyal, Krishna.

In: Journal of Empirical Finance, Vol. 34, 01.12.2015, p. 275-292.

Research output: Contribution to journalArticle

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