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Technological Specialization and the Decline of Diversified Firms

Published online by Cambridge University Press:  06 August 2018

Fernando Anjos  and
Cesare Fracassi
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Abstract

We document a strong decline in corporate-diversification activity since the late 1970s, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 4 , August 2018 , pp. 1581 - 1614
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

The authors appreciate comments from and discussions with Kenneth Ahern, Andres Almazan, Aydoğan Altı, Cláudia Custódio, Dirk Hackbarth (the referee), Jarrad Harford (the editor), Vojislav Maksimovic (Tepper/Laboratory for Aggregate Economics and Finance (LAEF) discussant), Matt Rhodes-Kropf (American Finance Association (AFA) discussant), Alessio Saretto, and Laura Starks. The authors also appreciate comments from seminar participants at HEC Montréal, NOVA School of Business and Economics, Texas A&M University, the University of Texas at Austin, the University of Texas at San Antonio, and the University of Washington, and participants at the following conferences: the 2012 European meetings of the Econometric Society, the 2013 North American Summer meetings of the Econometric Society, the 2014 meetings of the AFA, and the 2014 Tepper/LAEF Macro-Finance conference. This work was partially funded by National Funds through FCT (Fundação para a Ciência e Tecnologia) under the project Ref. UID/ECO/00124/2013 and by POR Lisboa under the project LISBOA-01-0145-FEDER-007722.

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