The Diversification Discount: Cash Flows vs. Returns
Working Paper 7396
DOI 10.3386/w7396
Issue Date
Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross-sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flow and returns.
Published Versions
Lamont, Owen A. and Christopher Polk. "The Diversification Discount: Cash Flows Versus Returns," Journal of Finance, 2001, v56(5,Oct), 1693-1721.