Focusing the corporate product: Securities analysts and de-diversification

The issue of corporate control is examined through an analysis of the de-di versification activity of publicly held American firms from 1985 to 1994. P rominent accounts of such behavior depict newly powerful shareholders as ha ving demanded a dismantling of the inefficient, highly diversified corporat e strategies that arose in the late 1950s and the 1960s. This paper highlig hts 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 analys ts, who specialize by industry-use to compare like assets, diversified firm s hinder efforts at valuing their shares. As a result, managers of such fir ms face pressure from analysts to dediversity so that their stock is more e asily understood. Results indicate that, in addition to such factors as wea k economic performance, de-diversification is more likely when a firm's sto ck price is low and there is a significant mismatch between its corporate s trategy and the identity attributed to the firm by analysts.