Is Corporate Diversification Beneficial in Emerging Markets?

Using a sample of over 1000 firms from seven emerging markets in 1995, we find that diversified firms trade at a discount of approximately 7% compared to single-segment firms. Diversified firms are also less profitable than single-segment firms, but lower profitability only explains part of the discount. We find a discount only for those firms that are part of industrial groups and for diversified firms with management ownership concentration between 10% and 30%. The discount is most severe when management control rights substantially exceed their cash flow rights. Our results do not support internal capital market efficiency in economies with severe capital market imperfections.