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Corporate Diversification: Good for Some Bad for Others

In this paper a model based on conflicts of interest between shareholders, the CEO and divisional managers is developed to explain why corporate diversification is good for some firms and bad for others.

It is shown that when the decision to diversify is endogenous, whether diversification

destroys value depends on the severity of con‡icts of interests and the complementarities across divisions and not, as usual in the literature that explains value-decreasing diversification, on the efficiency of internal capital markets.