Does Diversification Cause the ‘Diversification Discount’”? Financial Management 33(2

Using recent econometric developments about causal inference, I examine whether diversification destroys value. I estimate the value effect of diversification by matching diversifying and single-segment firms on their propensity score-the predicted values from a probit model of the propensity to diversify. I also use Heckman 's (1979) two-stage estimator for comparison purposes. Ifind that on average, diversification does not destroy value. This finding is robust to the choice of estimator, sample, measures of excess value, and specification. The diversification discount has been the subject of an active debate in corporate finance during the past few years. ' At the heart of the debate is the question of whether diversification destroys value. Many studies have replicated Lang and Stulz (1994) and Berger and Ofek's (1995) finding that diversified firms trade at a discount relative to single-segment firms. Yet, there is disagreement as to whether this finding can be interpreted as evidence of value destruction. This article examines this issue by using recent econometric techniques for causal inference. I argue that assessing whether diversification creates or destroys value is a particular case of the "treatment effects " literature that seeks to establish causation from non-experimental data. I use three different treatment effects estimators to address the diversification question and