Diversification, Organization, and Value of the Firm

Because corporate diversification and organization coevolve, diversification discounts, which are widely reported in the literature, can be caused by organizational structure, rather than by the industrial scope of the firm. The present paper examines this possibility based on a large sample of Japanese firms for which the legal (parent-subsidiary) structure of the organization is easily observable. I identify a significant discount for diversified firms with and without control over the organizational structure. I also find that firms with a legally segmented structure (e.g., holding companies) are deeply discounted. My results suggest that diversification and organization are both important determinants of firm value