I examine the dynamics of corporate diversification policies. Between 1980 and 1997, there is a net reduction in the proportion of U.S. firms that are diversified. It is largely driven by the 1980s. This trend is matched by a reduction in assets controlled by diversified firms. However, the reduction in assets controlled by diversified firms continues in the 1990s as it did in the 1980s. Diversification and refocusing decisions do not appear to be permanent choices. One-third of the firms that diversify refocus within 4 years while 12% of the firms that refocus subsequently diversify. This dynamic behavior of firms is related to the diversification discount. Those firms that diversify or refocus during the sample period exhibit a greater discount during their multi-segment years than firms that remain diversified throughout. The act of diversification is associated with the onset of the diversification discount. Firm characteristics such as age and R&D spending are related to the decision to diversify as well as the valuation of diversified firms. The most often stated reason for diversification followed by refocusing is that the initial diversification was a mistake.
