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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 294:
Why Agency Costs Explain Diversification Discounts

Henrik Cronqvist (), Peter Högfeldt () and Mattias Nilsson ()

Abstract: We study diversification within the real estate industry because of its relative transparency: portfolio management of assets with well-defined market prices. Diversification is over property types and geographical regions. The major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue non-focusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, are predominantly privately controlled and extensively using dual-class shares. The ex ante diversification discount is, therefore, a measure of agency costs.

Keywords: Diversification; Diversifying strategy; Ex ante discounts; Rent dissipation; Agency costs; Private control; (follow links to similar papers)

JEL-Codes: G30; G31; G32; (follow links to similar papers)

52 pages, January 21, 1999, Revised September 27, 2000

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This paper is published as:
Cronqvist, Henrik, Peter Högfeldt and Mattias Nilsson, (2001), 'Why Agency Costs Explain Diversification Discounts', Real Estate Economics, Vol. 29, pages 85-126



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