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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Apr 29, 2016

Short Sales Constraints and the Diversification Puzzle


Building on Miller’s (1977) short sales constraints insight, we construct a model showing that investors should disagree less about the valuation of a conglomerate than about the valuations of its individual divisions. Disagreement, combined with short sales constraints, increases asset prices and thereby implies a conglomerate discount. The model provides a wide variety of empirically testable implications about the incidence and size of the conglomerate discount. We test several of these predictions, and find that (i) conglomerates face fewer short sales constraints and have less dispersion of opinion than focused firms, and (ii) the conglomerate discount increases with short sales constraints and decreases with differences of opinion.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

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