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Short-Sales Constraints and the Diversification Puzzle
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Journal Article
Short-Sales Constraints and the Diversification Puzzle
2021
Overview
Disagreement about stock valuation, combined with short-sales constraints, can increase asset prices. We build a model showing that, so long as investor beliefs are not perfectly correlated, investors disagree less about the value of a conglomerate than about each of its individual divisions. This generates a conglomerate discount with disagreement and short-sales constraints being complementary in explaining its cross-sectional variation. We test these predictions empirically and find substantial support: conglomerates have lower differences of opinion and lower short-sales constraints than pure-play firms. Furthermore, greater differences of opinion and tighter short-sales constraints are significant predictors of valuation differences between conglomerates and pure plays.
This paper was accepted by Karl Diether, finance.
Publisher
INFORMS,Institute for Operations Research and the Management Sciences
Subject
