Corporate Diversification, Value Maximization, and Organizational Capabilities

This article develops a dynamic model of a firm in which diversification can be a value‐maximizing strategy even if specialization is generally efficient. The central idea is that firms are composed of organizational capabilities that can be profitable in multiple businesses and that diversification is a search process by which firms seek businesses that are good matches for their capabilities. The theory can account for diversified firms trading at discounts compared to single‐segment firms, as well as some empirical regularities that are challenging to the agency theory of diversification, such as positive returns to diversification announcements.