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The Diversification Discount: Cash Flows Versus Returns
Author(s) -
Lamont Owen A.,
Polk Christopher
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00386
Subject(s) - diversification (marketing strategy) , cash flow , cash , economics , variation (astronomy) , econometrics , monetary economics , cash on cash return , financial economics , terminal value , operating cash flow , business , cash and cash equivalents , finance , physics , marketing , astrophysics
Diversified firms have different values from 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 flows and returns.