“Product Market Competition and the Value of Diversification”
by Cansu İskenderoğlu
This paper examines how industry concentration affects the value of diversification and explores the strategic value of agency problems in product markets for concentrated conglomerates.
I find that conglomerates that operate mainly in concentrated industries have higher diversification values. Consistent with agency theories, agency problems, on average,lead to greater diversification discount. In contrast, agency problems in concentrated conglomerates create strategic advantage and lead to greater diversification values consistent with the notion that these conglomerates can credibly commit to their industries in case of competitive threats. Using import tariff reductions as exogenous competitive shocks, I show that concentrated conglomerates experience significant decline in their valuations when they are hit by competitive shocks and they respond more aggressively to competitive shocks in order to defend their market positions in less-competitive industries.