Is there an optimally diversified conglomerate? Gleaning answers from capital markets

Ali Nejadmalayeri, Subramanian Rama Iyer, Manohar Singh

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Motivated by recent productivity-based theories of diversification, we argue that only conglomerates with an optimal degree of diversification can utilize their comparative advantages across various industries and achieve economies of scope by eliminating redundancies. Evidence from both corporate bond and equity markets suggests that optimally diversified conglomerates consist of either (1) approximately five equally weighted divisions, or (2) one large core business segment that roughly accounts for 75 % sales. Moreover, the relative size of divisions has a critical impact on how diversification affects credit spreads and excess values. Nonparity among divisions correlates with greater costs that increase with the number of divisions.

Original languageEnglish (US)
Pages (from-to)117-158
Number of pages42
JournalReview of Quantitative Finance and Accounting
Volume49
Issue number1
DOIs
StatePublished - Jul 1 2017

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Capital markets
Conglomerate
Diversification
Correlates
Productivity
Credit spreads
Costs
Corporate bonds
Redundancy
Industry
Economies of scope
Equity markets
Bond market
Large core
Comparative advantage

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Cite this

Nejadmalayeri, Ali ; Iyer, Subramanian Rama ; Singh, Manohar. / Is there an optimally diversified conglomerate? Gleaning answers from capital markets. In: Review of Quantitative Finance and Accounting. 2017 ; Vol. 49, No. 1. pp. 117-158.
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Is there an optimally diversified conglomerate? Gleaning answers from capital markets. / Nejadmalayeri, Ali; Iyer, Subramanian Rama; Singh, Manohar.

In: Review of Quantitative Finance and Accounting, Vol. 49, No. 1, 01.07.2017, p. 117-158.

Research output: Contribution to journalArticle

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