Focusing the Corporate Product: Securities Analysts and De-diversification

The issue of corporate control is examined through an analysis of the de-diversification activity of publicly held American firms from 1985 to 1994. Prominent accounts of such behavior depict newly powerful shareholders as having demanded a dismantling of the inefficient, highly diversified corporate strategies that arose in the late 1950s and the 1960s. This paper highlights an additional factor that spurred such divestiture: the need to present a coherent product identity in the stock market. It is argued that because they straddle the industry categories that investors—and securities analysts, who specialize by industry—use to compare like assets, diversified firms hinder efforts at valuing their shares. As a result, managers of such firms face pressure from analysts to dediversify so that their stock is more easily understood. Results indicate that, in addition to such factors as weak economic performance, de-diversification is more likely when a firm's stock price is low and there is a significant mismatch between its corporate strategy and the identity attributed to the firm by analysts.