Corporate Diversification, Value Maximization, and Organizational Capabilities*

Corporate diversification is widely believed to be inefficient. It runs against one of the oldest ideas in economics, that specialization is productive. A popular explanation for its prevalence is that firms are plagued with agency problems that allow managers to enter new businesses (from which they privately benefit) at the expense of shareholders. However, the empirical evidence suggests that diversification is not entirely an agency phenomenon; although diversified firms trade at a discount relative to single-business firms, investors often bid up stock prices when firms announce diversification programs. While the agency view describes some cases well, it does not appear to provide a complete understanding of diversification. The goal of this article is to investigate the idea that in some cases diversification can be understood instead as a dynamic value-maximizing strategy revolving around the notion of organizational capabil-