Growth opportunities and the effect of corporate diversification on value

Abstract

This paper provides empirical evidence of how a firm's growth opportunities shape the diversification–value relationship on a sample of U.S. companies between 1998 and 2010. Our findings suggest that the negative relationship between diversification and a firm's value may reverse at high levels of diversification, and that such a U-form diversification–value relation is partly mediated by a firm's growth opportunities. Results are robust to various model specifications and after controlling for endogenous self-selection of the diversification decision.