Short-Sales Constraints and the Diversification Puzzle

Disagreement about stock valuation, combined with short-sales constraints, can increase asset prices. We build a model showing that, so long as investor beliefs are not perfectly correlated, investors disagree less about the value of a conglomerate than about each of its individual divisions. This generates a conglomerate discount with disagreement and short-sales constraints being complementary in explaining its cross-sectional variation. We test these predictions empirically and find substantial support: conglomerates have lower differences of opinion and lower short-sales constraints than pure-play firms. Furthermore, greater differences of opinion and tighter short-sales constraints are significant predictors of valuation differences between conglomerates and pure plays. This paper was accepted by Karl Diether, finance.

• 저널Management Science · 67(2) · 1159–1182
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.2019.3467
• 저자Adam V. Reed, Pedro A. C. Saffi, Edward Dickersin Van Wesep