Critical Finance Review > Vol 13 > Issue 1-2

The Berger–Ofek Diversification Discount Is Just Poor Firm Matching

John E. Hund, University of Georgia, USA, , Donald Monk, University of Florida, USA, , Sheri Tice, Tulane University, USA,
Suggested Citation
John E. Hund, Donald Monk and Sheri Tice (2024), "The Berger–Ofek Diversification Discount Is Just Poor Firm Matching", Critical Finance Review: Vol. 13: No. 1-2, pp 1-44.

Publication Date: 14 Feb 2024
© 2024 John E. Hund, Donald Monk, and Sheri Tice
Diversification discountOrganizational structureValuationMatching


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In this article:
1. Data and Sample Construction 
2. Economic Motivation 
3. A New Measure and Its Consequences 
4. Return Covariances and Excess Value 
5. Wait, How Can Industry Not Matter? 
6. Could It Be Endogeneity? Replication of Villalonga (2004b) 
7. Conclusion 
Appendix A. Propensity Score Matching Estimators 


The widely used measure of diversification value developed by Berger and Ofek (1995) consistently matches large and old diversified firms with small and young focused firms. Since valuation multiples decline with sales and age this approach manufactures a discount. We develop a new measure based on sales and age matching and show that it leads to different and more intuitive conclusions. Using daily returns, we conclude that sales and age matched firms are more than twice as correlated with diversified firms than firms chosen by the Berger and Ofek (1995) methodology and the return-weighted discount is zero. For most firms, the diversification discount is an artifact of the methods used to create it.