Does Diversification Strategy Create or Destroy Value

The authors examine the financial structure of diversified corporations in Japan and measure diversification discount/premium. First, we find that the more diversified a business is, the lower its profitability, turnover, and business risk, and the higher its financial leverage. Second, using business segment data, the valuation e # ect of diversification is examined for large samples of firms in Japan for 1998-2001. We find a 5% discount for unrelated diversified firms on average. By dividing the discount/premium into several factors, the overall discount is due to a large discount for unrelated diversification strategy, which cannot be o # set by the premium from a tax-savings e # ect from high financial leverage.