About Estimating Gains from Diversification and Why Firms Self-Select

This paper aims to shed light on the alleged contradiction between the observed conglomerate discount and a value creating effect of diversification itself. For this reason, we apply endogenous switching regressions on a sample of 51,878 US-firm years recorded over the years 1992-2012 in order to obtain counterfactual firm values of random average firms, firms decided to diversify and firms that refrained from this choice. For all of them, we find a beneficial effect of diversification. Disembarking from this outcome, we are able to answer why eventually only firms with negative selection quality choose to diversify