Focusing the Corporate Product: Securities Analysts and De-Diversification

By Ezra W. Zuckerman
1999| Working Paper No. 1570

The de-diversification activity of publicy-held, American firms from 1985-1994 is examined. Prominatent accounts of such behavior depict firm as returning to traditional, largely efficiency-based, patterns of diversification. This paper highlights an additional factor that spurs such divestiture: the need to pesent a coherent product identity in the stock market. It is arguedthat, by straddling the industry categories that are used by inventors-and securitites analysts,who specialize by industry- to compare like assets, diverified firms pose valuation problems. Results indicate that, in addition to other factors such as weak economic performance,de-diversifications more likely when a firm’s industrial participation is not validated by such industry specialists. Corporate de-diversification should be understood, at least in part, as a realignment of a firm’s market identity with that given in its network of analyst coverage.