Shopping for Information? Diversification and the Network of Industries

We propose and test a view of corporate diversification as a strategy that exploits internal information markets, by bringing together information that is scattered across the economy. First, we construct an interindustry network using input-output data, to proxy for the economy's information structure. Second, we introduce a new measure of conglomerate informational advantage, named "excess centrality," which captures how much more central conglomerates are relative to specialized firms operating in the same industries. We find that high-excess-centrality conglomerates have greater value, and produce more and better patents. Consistent with the internal-information-markets view, we also show that excess centrality has a greater effect in industries covered by fewer analysts and in industries where soft information is important. This paper was accepted by Gustavo Manso, finance.