Tobin's q, Corporate Diversification, and Firm Performance

In this paper, we show that Tobin's q and firm diversification are
negativelyArelated throughout the 1980s. This negative relation
holds for different diversification measures and when we control
for other known determinants of q. Further, diversified firms have
lower q's than comparable portfolios of pure-play firms. Firms that
choose to diversify are poor performers relative to firms that do not,
but there is only weak evidence that they have lower q's than the
average firm in their industry. We find no evidence supportive of
the view that diversification provides firms with a valuable intangible
asset.

I. Introduction
When do shareholders benefit from firm diversification? Coase's answer
is that the boundary of the firm should be at the point at which
"the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of
an exchange in the open market or the costs of organizing in another
firm" (Coase 1937, p. 395). As pointed out by Williamson (1981) and
others, this answer requires an operational definition of transaction
costs.